Should You Gamble on These Casinos?
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ve only been to Las Vegas once. It was nearly three years ago now, for New Year’s 2010. Back then, Las Vegas was really hurting. The U.S. was just starting to climb out from the bottom of the recession, so nobody felt like gambling money. It was easy to find $5 blackjack tables on the strip and while I didn’t stay at any of the hotels, accommodations were very inexpensive had I chosen to.
Las Vegas is not the gambling epicenter it once was. Many would say that title now belongs to Macau. A growing economy in China helped pull many Las Vegas associated companies through tough times in the U.S. Growth in Macau has been great for companies like Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS), which generate nearly two-thirds of casino revenues from the city.
However, with the recent down turn in the Chinese economy, gambling resorts are facing headwinds. Wynn saw revenues decline 4.3% in the Chinese territory during its most recent quarter. This comes on the back of a 7% decline the quarter before. Las Vegas Sands has seen revenues slowing in Macau as well, and with its hefty investment in the area has now missed analysts’ revenue estimates two straight quarters.
Meanwhile, Caesars Entertainment (NASDAQ: CZR) has stayed out of the Macau region. Instead, the company is focused on growing its presence throughout the United States. Yet even as the U.S. economy is starting to show some real progress, the company’s revenues continue to slow.
With all three companies hurting, should you gamble on any of them?
Las Vegas Sands
Priced at 25 times past earnings, Las Vegas Sands is priced at higher multiples than its competition. However, with a new casino being built in Macau and the potential for expansion across the Asian market, Europe, and South America, I believe the stock price could move higher still based on news like this alone.
In the short-term, however, new resort developments may cause bears to beat the stock down based on capital expenditures. In the long run, expect those moves to pay off, as China’s economy is showing signs of a soft-bottom, and the growing consumerist population of Asia flocks to casinos.
Trading at just over 20 times past earnings, Wynn is priced at a discount to Las Vegas Sands. However, Wynn underperforms Las Vegas Sands in terms of growth potential and operating and profit margins. This results in a PEG of nearly 2 compared to a ratio closer to 1 for Las Vegas Sands. Its strongest point is the company’s ability to generate free cash flow, which it uses to return value to stockholders through special dividends.
Over the last six quarters, Wynn has missed earnings estimates four times. This trend does not inspire a lot of confidence in investors.
The company plans to open a new resort in Macau’s Cotai Strip in 2016. This will be the company’s third resort in the Macau region. However, it still lags behind Las Vegas Sands developments in the area as the latter has already captured nearly 20% of the market.
I recommend Wynn Resorts as more of a dividend play. It recently announced a 100% dividend increase to $4 annually. It also has a knack for paying out special dividends just about every year, most recently it paid out a $7.50 dividend. However, for the long-term investor looking for more than just a few dollars from dividends, Las Vegas Sands looks like a better investment.
Caesars missed the boat over to Macau, and it could be the costliest ticket the company didn’t purchase. While its competitors were setting up shop in Macau, Caesars looked to establish an empire of casinos across the United States. Yet, even with the U.S. economy’s turn around, revenues and earnings for Caesars have not done the same.
The problems for Caesars start with their balance sheet. The company currently carries a debt load twenty times the amount of cash it has. This amount of debt is simply unsustainable, and the company needs to start generating more cash flow to make a turn around.
However, the cash may never come. Operations outside of Las Vegas are actually deteriorating. Last quarter, the number of visitors decreased for each of its locales in the U.S. and aside from Vegas, spending per trip went down everywhere as well. This was during the summer vacation quarter, which is the most important to resort casinos. The company is not even generating enough cash to fully service its debt.
The U.S. market is just about tapped out. There’s very little upside in the States anymore. In Macau, the industry still has plenty of room to grow. I believe Caesars made a big mistake by not investing in Asia, and recommend people sell the stock before it goes bankrupt.
Invest to Impress
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adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.