Sin City is making a comeback. At least that's the way it looks for gaming investors who are watching the gradual rise in gaming revenue in Las Vegas. This year, it will likely come in just below the 2007 peak that Las Vegas casinos brought in before the financial crisis that kept many visitors away from leisure travel and gambling.
But even though Vegas is starting to look like a good bet again, companies like Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), Caesars Entertainment (NASDAQ:CZR), and MGM Resorts International (NYSE:MGM) could still be a risky bet if Las Vegas were to crash again. But which of these casino companies is most at risk?
It's not a Vegas crash that will tumble Las Vegas Sands or Wynn
Las Vegas Sands and Wynn Resorts each posted record-setting first-quarter results this year, helping to push their stock prices to record highs. The reason that Las Vegas Sands and Wynn Resorts were the biggest winners in 2013 and Q1 2014 is that these companies have made their largest bets in Asia, particularly Macau. Las Vegas Sands got 86% of its 2013 revenue in Asia -- around 60% of the total from Macau alone -- while Wynn took in a whopping 75% of its total revenue from Macau.
These companies would lose big on a slowdown in Macau, which is exactly what has happened in Q2 and Q3. The VIP segment in Macau, made up of high-net-worth players mostly from Mainland China, has been dramatically lower this year following government regulations on the third-party companies that have historically brought many VIP players to Macau.
However, the long-term story in Macau still looks strong, with the continued rise of the mass-market segment, and both companies are preparing to open a new megaresort on the Cotai Strip in the next 12-18 months. So, while Macau's ups and downs have a major impact on these companies' global revenue, Las Vegas still has very little.
Caesars would be hit hard
A slowdown in Las Vegas would be catastrophic for Caesars Entertainment, but the company is also losing even as Vegas revenues are rising. Caesars gets around 50% of its revenue in Las Vegas, yet, even during this time when Vegas gaming is rising, this company is still losing in a major way with massive income declines year over year being posted every quarter this year. Again, this is coming during a year when nearly every other major gaming company has been able to post rising revenue and EBITDA in Vegas, thanks to the city's renewed growth.
In fact, Caesars actually might be the biggest loser if Las Vegas continues to do well. There's stiff competition in the city, especially from the coming $4 billion Resorts World Las Vegas integrated resort by Malaysian gaming company Genting, which is set to open phase one by late next year. Caesars looks set to lose even more in Las Vegas from other companies doing well than it is from Las Vegas crashing. Caesars Entertainment isn't the biggest loser if Las Vegas crashes again, it's just the biggest loser, in general.
The gaming company with the most to lose if Vegas crashes again: MGM
There are three reasons why MGM is my winner for the title of most to lose if Vegas has another slowdown.
1. Vegas is MGM's biggest market
MGM has more than 10 properties in Las Vegas, and revenue there accounts for around half of MGM's total revenue. This has been a highlight in Q2 and Q3 of this year when Vegas' increased total gaming revenue helped to bump MGM's year-over-year net revenue growth, while Las Vegas Sands and Wynn were being hammered in Macau. But with such a large percentage of its revenue still tied to Las Vegas, MGM's risk is increased there if there's another slowdown.
2. MGM has less diversification outside of the U.S.
Because MGM has only about one-third of its global revenue coming from Macau, the massive slowdown there this summer has not been such a catastrophe for MGM as it has been for some of its main competitors. However, should the U.S. gaming market take a hit, MGM will not have the diversified portfolio that other companies have to weather a Vegas slump -- such as Sands with casinos throughout the U.S., Macau, and Singapore. That could change, as MGM also has another new resort being built in Macau, but it still will be the last of the major resorts to open there. Sands and Wynn are already gaining on mass market growth because their new casinos are opening earlier.
3. MGM relies on increased visitors and steady room rates to keep its Vegas profits rising
Not only has MGM been able to increase its gaming revenue in Las Vegas, it has also done a great job of keeping hotel occupancy rates high. This increase in RevPAR, or revenue per available room, in Vegas helped MGM to post incremental margins of more than 60% in the recent quarter. This could be a good trend for MGM, as the number of visitors to Las Vegas is reaching record levels so far this year. MGM also has continued new construction in Vegas to take advantage of the surge in visitors and non-gaming revenue. Still, much of MGM's recent success depends on increased visitors, and keeping these room rates and margins strong. A slowdown in Vegas could leave MGM with a lot of empty rooms and, thus, declining margins.
MGM looks to be the best play now on the Las Vegas comeback. For investors who believe in the long-term Vegas success story, this could make a great bet. But be wary because, in the event of another Las Vegas crash, MGM has the most to lose.
Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool is short Caesars Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.