Gaming stocks can provide both big opportunities and big risks for investors. Before betting on which company is going to make you the most money, it's important to understand both sides of the equation. So let's look at which gaming company provides the best long-term odds for investors.
Las Vegas is now one of the bright spots in the gaming industry. Public domain photo.
Asia remains the best opportunity
The first thing to consider in gaming companies is the markets they serve and the opportunity in those markets. In the U.S., there's essentially Las Vegas and everywhere else. Las Vegas is recovering slowly from the recession and provides a decent opportunity for gaming companies. However, regional gaming, particularly in Atlantic City, is floundering. Increased competition from expanded gambling in states has led to revenue reductions and losses across the industry. The best stock in gaming won't be found in regional gaming in the U.S., so our focus should be Las Vegas and Asia.
Wynn Resorts' new resort in Cotai could double the company's revenue and profits. Source: Wynn Resorts.
Las Vegas Sands (LVS +1.64%), Wynn Resorts (WYNN +2.22%), and MGM Resorts (MGM +0.26%) have properties in Las Vegas and Macau, while Melco Crown (MPEL +1.52%) is focused on Macau. These are the best opportunities for gaming investors and the stocks I will focus on below.
Caesars Entertainment (CZR +0.00%) has resorts in Las Vegas but gets a majority of its revenue from regional gaming, so I'll eliminate it from consideration. The regional drag, along with a corporate structure that would make anyone's head spin, make this a stock I'd stay away from.
Valuing gaming stocks
Now that we have our top four, it's time to look at what we're paying for each stock.
To value gaming companies, the best method is to take the enterprise value, or market cap plus net debt, and divide by EBITDA, a proxy for cash flow. The table below includes the figures that go into this calculation and the multiple for each of the four companies that have exposure to Las Vegas and/or Asia.
|
Market Cap |
Net Debt |
EBITDA |
EV/EBITDA | |
|---|---|---|---|---|
|
Las Vegas Sands |
$50.9 billion |
$7.1 billion |
$5.28 billion |
11.0 |
|
Melco Crown |
$15.1 billion |
-$26.3 million |
$1.39 billion |
10.9 |
|
Wynn Resorts |
$18.7 billion |
$4.3 billion |
$1.85 billion |
12.4 |
|
MGM Resorts |
$11.7 billion |
$11.6 billion |
$2.43 billion |
9.6 |
Source: Company earnings reports and SEC reports.
I'll note that all four of these companies are also building new resorts in the Cotai area of Macau, so they'll likely grow over the next three years as these sites are completed. Outside of Melco Crown, which has a part ownership in a new resort in the Philippines, the companies have similar expansion opportunities in the near term.
Las Vegas Sands' The Parisian in Macau, which is under construction. Source: Las Vegas Sands.
The best stock in gaming
Right now, buying gaming stocks is all about maximizing reward for the least amount of risk. Macau's gaming revenue has fallen for three straight months, so there's downside potential if that trend continues, which should worry investors. There's also debt load to consider, which is why I'll take MGM Resorts (and its $11.6 billion in net debt) out of the running despite the leveraged upside the stock could have if Las Vegas and Macau grow in coming years.
Melco Crown also has potential, but it isn't approved for table games yet at its Studio City resort in Macau, and the Philippines is an unknown asset at this point.
In my opinion, Las Vegas Sands and Wynn Resorts jointly hold the top spot in gaming this quarter because they provide upside with less risk than their competitors. Las Vegas Sands should continue to benefit from mass market growth in Macau and has net debt of just 1.3 times trailing EBITDA. Wynn Resorts is building its third property, this time on Cotai: When Wynn Palace is complete it could double the company's EBITDA.
These are the two best bets in gaming right now, and I think they'll trounce the market by a wide margin over the long term as well.
