The Parisian in Macau. Image source: Las Vegas Sands.
The gaming industry has been through a volatile two year stretch, driven by the rapid decline in Macau's gaming market. But as 2016 moves along, it appears that Macau's gaming market has hit bottom, and there's a little ray of hope on the horizon.
And there couldn't be better news for the gaming industry, considering the rapid increase in gaming resorts opening in the next 18 months. Wynn Resorts (WYNN 1.07%), Las Vegas Sands (LVS 0.80%), and MGM Resorts (MGM +1.38%) will all add properties to the Cotai region of Macau, which just added Studio City from Melco Crown (MPEL 1.09%). Which begs the question: which gaming stock is best for investors today?
The value in gaming
To frame the market for investors, it's important to look at the value for gaming companies as they stand today. The best way to do that is to look at the enterprise value (market cap plus net debt) of these companies compared to EBITDA, which is a proxy for cash flows. As you can see below, MGM Resorts is the cheapest gaming stock on this measure, and Wynn Resorts is the most expensive.
|
Market Cap |
Net Debt |
EBITDA (ttm) |
EV/EBITDA | |
|---|---|---|---|---|
|
Las Vegas Sands |
$41.70 billion |
$7.29 billion |
$4.17 billion |
11.8 |
|
Wynn Resorts |
$9.51 billion |
$6.90 billion |
$1.19 billion |
13.8 |
|
MGM Resorts |
$11.59 billion |
$11.11 billion |
$2.53 billion |
9.0 |
|
Melco Crown |
$8.95 billion |
$1.30 billion |
$931.9 million |
11.0 |
Source: Company earnings releases. Calculations by author.
What this doesn't account for is the growth opportunities each company has ahead of it. For example, most of MGM Resorts' revenue comes from Las Vegas, which is growing slowly and steadily, while Wynn Resorts is building a new resort called Wynn Palace in Macau that could double its revenue the moment it opens. So, we need to consider those growth opportunities.
Wynn Palace. Image source: Wynn Resorts.
New properties will reshape Macau
As I mentioned, Melco Crown opened Studio City last year. Wynn Resorts will also add Wynn Palace this summer, Las Vegas Sands is expecting to open The Parisian late this year, and MGM Resorts will open MGM Cotai in 2017.
If you just look at the EBITDA numbers above, adding a single resort, Wynn Resorts will likely get the biggest relative impact to its business with the resort, and Las Vegas Sands the smallest. MGM Resorts only owns 51% of its Macau business, so the impact from MGM Cotai will be somewhat muted there as well. So the impact of new construction will be different for each company.
Macau may also remain under pressure in 2016 as China's economy lumbers along. Making matters worse, these new resorts will cannibalize revenue from existing resorts. If you only have one resort, like Wynn and Melco Crown do, that's not the end of the world, but Las Vegas Sands may lose business at existing properties this year, even if Macau's gaming revenue is flat.
When deciding on the best stock in gaming, these new properties and the trends in gaming regions need to be taken into account.
The best stock in gaming today
Now that value and growth opportunities are laid out, we can look at where investors should put their gaming bets. Considering the growth Wynn Palace will add to Wynn Resorts, I would rather own that stock than either Melco Crown or Las Vegas Sands, which don't have the same relative growth opportunities in 2016 and beyond. So, those two are out.
When looking at the EV/EBITDA ratio of 13.8 at Wynn and 9.0 at MGM Resorts, I think MGM currently provides a better value for investors, with a lot of safety built in. Las Vegas is growing slowly and steadily right now, and MGM Cotai will be gravy for the company when it opens next year. And if management can reduce debt, it'll reduce risk further. Investors buying gaming stocks today should take a look at MGM Resorts.
