The casino industry has experienced many wins and losses in the past couple of years. It still offers huge opportunities, along with many risky bets to watch out for. Here's a look at the state of the industry, along with some of the best casino stocks.
The gaming industry in 2015
The gaming industry looked strong through the first quarter of 2014, with Asian hot spot Macau particularly helping to set profit records for companies such as Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN). However, trouble started as Chinese President Xi Jinping sought to crack down on corruption, including thwarting illicit activity by "VIP" players who were gambling in Macau (a special administrative region of China). Companies with the biggest bets on Macau have subsequently experienced major hardships.
Meanwhile, Las Vegas is showing signs of recovery, and its largest company by number of properties and total revenue gain, MGM Resorts International (NYSE:MGM), has been increasingly growing on the improved market conditions. Gaming revenue continues to decline, but that is being offset by rapid growth in other areas such as hotel revenue, convention space use, and entertainment.
Here are a few other interesting changes anticipated this year or in 2016 in the casino world:
- Japanese lawmakers are seeking to legalize gaming resorts on the island nation, which could become the second-largest gaming hub in the world. This bill is expected to be voted on by August.
- Gaming growth in other parts of Asia, such as the Philippines and Vietnam, could help alleviate the downward pressure from Macau.
- Macau itself looks to be nearing a turnaround in which "mass market" gaming revenue growth will make up for the loss in VIP gamers (with help from increased entertainment and nongaming diversification). Four new megaresorts are scheduled to open in Macau in 2016.
- Convention and entertainment revenue continues to grow in Vegas, which might possibly become home to a new National Hockey League team. NHL governance is expected to vote on the expansion in the coming months.
Let's dig in on the bad, the ugly, and the good.
- Wynn Resorts
Wynn has taken a massive hit to earnings in the last year due to its reliance on Macau, particularly the VIP market there. More than two-thirds of Wynn's global revenue was from Macau in April 2014. One previous bright spot for the Wynn investing thesis was the company's industry-high dividend. Unfortunately, management cut that payout as revenue declined in Macau.
Wynn's shares are worth less than half of what they were in April 2014. Wynn also doesn't look to have much compelling diversification or future growth drivers unless Macau returns to its glory days. Even if Macau does turn around, other companies such as Las Vegas Sands seem set to win the majority of this market.
- Melco Crown
Melco Crown (NASDAQ:MLCO) has looked like a great bet for investors in the past few years, as its Hong Kong heritage and management helped make the company extremely successful in Macau (both areas are special administrative regions of China in which Cantonese is the given language, and they are linked by a short ferry ride, with a bridge crossing coming soon). However, the company's only real bet has been its one casino in Macau, which means Melco Crown cannot escape Macau's drop.
Melco Crown did open a resort in the Philippines earlier this year. With more Asian diversification and a likely better chance to steer the Macau/Chinese political issues going forward, Melco Crown might still be a good bet on a Macau turnaround and growth in gambling in Asia in general. However, the company's relatively small size makes it hard to forecast how successful it might be in the Philippines. Until this company can prove itself more than a bet on Macau's turnaround alone, it remains very risky.
- Caesars Entertainment
Caesars Entertainment (NASDAQ:CZR) looks like the worst bet in the industry. Caesars' big mistake was to give up its one Macau property after being denied a bid to build in South Korea. With no Asian presence, limited diversification outside the U.S., poor operations domestically, increasingly large net losses, and an incredibly high debt load, management has had to seek court help to reorganize.
It did so by first transferring much of its property and debt obligations to a subsidiary (Caesars Entertainment Operating Co.) and then putting that entity into Chapter 11 bankruptcy protection. Creditors were not happy and have sued Caesars. Investors remain worried about what could happen to the parent company.
- MGM Resorts
MGM has been the biggest winner on Las Vegas' resurgence. MGM has 11 major properties in Vegas, roughly 27% of the total hotel room count in the city, and it offers by far more convention space than any other company. Additionally, MGM is constructing a new arena next to the Vegas Strip (expected to open in 2016) that could house any potential new Las Vegas NHL team.
While MGM is the most expensive of these stocks by P/E, and also holds a high level of debt (second only to Caesars), it also has the most compelling current growth trajectory thanks to its Las Vegas dominance.
- Las Vegas Sands
Las Vegas Sands is also heavily invested in Macau. However, Sands is much better diversified around Asia than its competitors, with a strongly performing resort in Singapore, plans for resorts in Vietnam and South Korea, and a strong likelihood of being the first gaming licensee in Japan if gambling is legalized there.
While betting on Macau's recovery alone might be risky, higher profitability there in 2016 would make Sands the biggest winner thanks to its region-leading number of properties and hotel rooms. From a fundamental investing perspective, Las Vegas Sands is also the best bet thanks to its low P/E (just 16, compared to 23 for Wynn), as well as a solid balance sheet featuring great cash flow, low debt, and a nearly 5% dividend yield.
One major risk for Las Vegas Sands is a lawsuit filed by the former CEO of subsidiary Sands China. The suit alleges all kinds of illicit activity by Sands management. Assuming the lawsuit is resolved favorably to Sands, the company could have a great growth trajectory thanks to its investments in Asia in recent years.