At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Today we're going to take a look at one of the stock market's better analysts, top-10%-rated Janney Capital -- and specifically, at three of its stock picks in the casino sector. This morning, Janney announced it is resuming coverage of the sector, and assigning the following ratings (among others):

In addition to assigning new price targets to the stocks ($150 for Wynn, $57 for LVS, and $24 for MGM), Janney also added some color on each stock. Specifically:

  • On Wynn: "Competitors on Cotai [are] concerned about opening dates and table allocations for new properties. We think this could negatively impact the perception of the Wynn Palace until it opens. On the positive side, LV fundamentals are strong and WYNN has a very talented management team."
  • On LVS: "Growth in Macau" is a concern here, as well. Also, Janney worries that "LVS will lose market share once new competition opens on Cotai." Adding to these headwinds, Janney sees "limited growth from Singapore going forward."
  • And finally, on its favored pick, MGM Resorts: Although "the future outlook for Macau is very uncertain," Janney notes that "Las Vegas trends are favorable, which is a positive considering MGM obtains ~60% of its EBITDA from this location."

This last comment is really the big differentiator among the three businesses. According to S&P Capital IQ data, despite its name, Las Vegas Sands today actually gets the vast bulk of its earnings before interest, taxes, depreciation, and amortization from outside Las Vegas -- Macao and Singapore particularly. Similarly, Wynn Resorts might as well rename itself "Macau Resorts" -- because that's where Wynn finds 73% of its EBITDA.

In contrast, MGM still derives more than 60% of its revenues, and close to 69% of its EBITDA, from wholly owned domestic resorts right here in the U.S. Where business is apparently booming... Which is apparently why Janney likes it...

But is Janney Capital right to recommend MGM stock? Perhaps.

Let's go to the tape
After all, according to Motley Fool CAPS -- where we've been tracking Janney's performance as a stock picker for these past eight years -- Janney has historically been a strong performer on casino stocks. In addition to ranking in the top 10% of analysts we track overall, Janney boasts a record of 55% accuracy on its active picks in the (officially named) Hotels, Restaurants and Leisure sector.

These include such successful recommendations as:


Janney Says:

CAPS says (out of 5 stars possible):

Janney's Picks Beating S&P By:

Churchill Downs



11 points

Penn National Gaming*



98 points

Ryman Hospitality



164 points

Source: Motley Fool CAPS. *Note that according to, Janney also re-recommended shares of Penn National Gaming Monday, assigning a "buy" rating and an $18 price target.

But regardless of how well Janney has done in the past, the more important question for investors is whether Janney is right about MGM today. And that, I fear, is a very open question indeed.

Valuation matters
Apologies for the head fake, but the plain truth is that MGM is a riskier bet than either of the two stocks Janney is leaving on the table (Wynn and Las Vegas Sands). According to, MGM shares carry the highest P/E ratio of these three stocks (64.5 times earnings, versus just 17.8 for Wynn and 16.2 for LVS). MGM also pays no dividend, whereas both Wynn (4.1% yield) and LVS (3.7% yield) do.

Granted, there are some points in MGM's favor. For one thing, finviz estimates show that MGM is likely to grow earnings somewhat faster than its two big rivals. Also, S&P Capital IQ data show MGM generated $438.5 million in positive free cash flow over the past year -- nearly three times reported net income. In contrast, Wynn Resorts is currently generating about 43% less cash profit than is reflected on its income statement. (Las Vegas Sands is generating somewhat more FCF than it reports as net income -- but not three times more).

The upshot for investors
But what it all comes down to in the end, is this: MGM shares sell for 64.5 times earnings, which is a very lot to pay for its projected 12.5% long-term earnings growth rate. Free cash flow, while strong, isn't strong enough to get the stock's price-to-free cash flow ratio down much below 24 -- and that's still nearly twice what you'd ordinarily want to pay for a 12%-ish grower with no dividend yield.

Long story short, I agree with Janney that Wynn Resorts, with weak free cash flow and the slowest growth projections of the group, is no bargain. But I have to disagree with the analyst on its prediction that MGM Resorts will do any better. The stock simply looks too expensive for me.

(Sidenote: I also think value investors should give Las Vegas Sands a closer look. Janney may not be impressed with it, but if you ask me, LVS's modest debt load (about $6.8 billion, net of cash), strong free cash flow ($3.8 billion), and generous dividend yield (3.7%) all add up to a pretty intriguing valuation -- about 13.7 times free cash flow for a total return of 15.2% annualized -- or a total return ratio of just 0.90).