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Macau Recovery: Gaming Stocks Don't Scream "Buy" Quite Yet

By Travis Hoium – Jul 9, 2015 at 9:00AM

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Gaming stocks have recovered recently but is the pop justified?

Wynn Palace will open in 2016 and will either draw more visitors to Macau or eat away at existing business. Image: Wynn Resorts. 

Gaming stocks are suddenly among the hottest on the market. A week ago the industry was dealing with weak gaming revenue for June and a looming smoking ban, which could hurt gaming even more.

But analysts are starting to become more bullish, notably Credit Suisse's Ken Fong, who single handedly sent shares of Las Vegas Sands (LVS -0.69%), Wynn Resorts (WYNN 0.36%), Melco Crown (MLCO 2.04%), and MGM Resorts (MGM -0.29%) higher on Tuesday after calling a "policy bottom" for the region. But is there value in gaming stocks or are shares turning around too soon?

How much are gaming stocks worth?
The first thing to look at is what gaming stocks are worth. To gauge this, I've built the table below calculating enterprise value (market cap plus net debt) divided by the annual run rate EBITDA in Q1. With EBITDA dropping at over 30% year over year it wouldn't be a fair representation to use trailing 12-month EBITDA, so I just annualized Q1's numbers to approximate value. The data below is based on market values at the close on Tuesday, July 7. 


Q1 2015 EBITDA

Annualized EBITDA

Enterprise Value


Wynn Resorts

$323.0 million

$1.29 billion

$17.8 billion


Las Vegas Sands

$1.05 billion

$4.20 billion

$52.9 billion


Melco Crown

$253.3 million

$1.01 billion

$12.2 billion


MGM Resorts

$672.0 million

$2.69 billion

$23.3 billion


Data Source: Company earnings releases and SEC filings. Calculations by the author.

Based on this metric, MGM Resorts is the best value in the industry and has the benefit of generating most of its revenue in the stable market of Las Vegas. Wynn Resorts, Las Vegas Sands, and Melco Crown are all trading with a low double digit multiple, which is similar to multiples seen over the past two years (seen here and here).

The problem is, Macau is now shrinking and it's easy to argue that gaming stocks don't deserve double digit EV/EBITDA multiples any longer. So, rather than being a value for investors they may be very expensive. 

Melco Crown's fifth tower at City of Dreams in Macau. Image: Melco Crown.

Is a turnaround eminent or not?
Whether or not you think the chart above shows a lot of value or not the performance of gaming stocks will come down to Macau's gaming revenue growth or decline. And there's not a lot of clarity on whether the decline of the past year is nearing an end or just beginning.

On the plus side, monthly revenue stabilized in the spring (only to see a plunge in June) and you would think a bottom has to hit eventually. The crackdown on corruption that has kept gamblers home can only keep them away so long and with the Chinese stock market crashing people may gamble in casinos rather than on the stock market, which they've increasingly been doing.

But the downside risk is significant as well. A smoking ban that's been proposed for all casinos could slash $3.4 billion from gaming revenues next year, according to Deutsche Bank. And if the Chinese economy struggles due to this market crash it could be a long, long road to recovery.

Time to buy or not?
If you have a very long time horizon I wouldn't be worried about owning gaming stocks today. Las Vegas Sands, Wynn Resorts, and Melco Crown are still spitting off cash at an incredible rate despite the decline of revenue in Macau and their balance sheets can withstand a prolonged contraction. 

MGM Resorts actually looks like a great buy today and I'll consider adding shares in coming weeks given the relative strength in Las Vegas and an upcoming expansion in Macau.

Long-term, Macau is building an entertainment hub that may outshine even Las Vegas and that will be a draw for tourists around the world for many years to come. That's what investors should be looking at, not the weekly or monthly gaming numbers from Macau. But that takes a long-term horizon, something that's needed to be a gaming investor today.

Travis Hoium owns shares of Wynn Resorts, Limited. The Motley Fool has no position in any of the stocks mentioned. 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.

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