What: Shares of casino and resort operators Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), Melco Crown Entertainment (NASDAQ:MLCO), and MGM Resorts (NYSE:MGM) caught fire in Thursday's trading session, gaining anywhere from 1.5% on the low end, as was the case for MGM, to as much as 5.9% for Wynn Resorts. The catalyst was coverage initiation on all four casino operators by Wall Street firm Brean Capital, which is optimistic about operations in Macau.
So what: According to Bryan Maher, the covering analyst at Brean Capital, all four of the aforementioned casino operators were started with a "buy" rating. Maher's price targets for each company went as follows:
- Wynn Resorts: $174 price target, implying 34% upside from yesterday's closing price.
- Las Vegas Sands: $65 price target, implying 16% upside from yesterday's closing price.
- Melco Crown: $31 price target, implying 35% upside from yesterday's closing price.
- MGM Resorts: $27 price target, implying 18% upside from yesterday's closing price.
Maher suggests that "Macau's gross gambling revenue has suffered because of China Premier Xi Jinping's anti-corruption crackdown," but he also suggests that the second half of 2015 should lead to improving conditions as new properties begin to open in Macau. Maher implies that these new properties should boost tourism to the region, leading to gross gambling revenue growth of approximately 11% on a year-over-year basis.
Additionally, Maher points to tough year-over-year comparisons in recent quarters as a further reason why Macau results have disappointed.
Now what: The real question that investors need to ask themselves here is whether the Macau bullishness is worth buying into, or if recent weakness could drag these companies down further.
As you might imagine, there's a case to be made on for betting on both red and black.
For pessimists it's really hard to deny that China's money laundering crackdown isn't hurting gaming revenue. According to data from the Gaming Inspection and Coordination Bureau, gaming revenue sank 48.6% in February 2015 from the year-ago February, with revenue from VIPs shrinking 57% and mass market revenue dipping 35%. It also marked a four-year low for gross gambling revenue in a month. The data haven't suggested a turn higher as of yet, meaning more pain could be in the offing for shareholders of casino and resort operators with strong ties to Macau.
Optimists need to look no further than Asia's rapid economic growth to feel excited. Even if recent government policy has thwarted VIP gambling growth, this is likely going to be a short-term effect, and it should even lead to some very favorable year-over-year comparisons come next year. Macau continues to be a high-interest tourist attraction and the opening of new properties should lead to a significant bottom-line boost for the industry.
While I do share Brean Capital's optimism for Macau casinos in general, I'm a bit more selective when it comes to these individual companies. Without getting too technical, I believe Wynn and Las Vegas Sands have done a particularly good job of attracting high-margin VIP customers, with Las Vegas Sands having a slight edge with the mass market. Comparatively, Las Vegas Sands and Wynn also have forward P/Es and PEG ratios that look appealing, and they certainly have the dividend edge. MGM's inconsistencies and Melco Crown's slower growth expectations (relative to Wynn and Las Vegas Sands) make these two casino and resorts stocks you could probably pass on.