Which Casino Should You Bet On?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Casinos are an interesting business. It makes money on the basic psychology of human beings: the desire to get rich quick. The business is really a cash cow, generating a huge sustainable cash flow over time. It doesn’t need any inventory or account receivables. However, in order to operate in the casino business, companies are required to build hotels/resorts, which incur huge capital expenditures. Investors, if interested, should find a company that has substantial insider ownership, is reasonably leveraged, and is selling in the market at an undervalued price.

Let’s take a quick look at four casinos including Wynn Resorts (NASDAQ: WYNN), Las Vegas Sands (NYSE: LVS), MGM Resorts, (NYSE: MGM) and Melco Crown Entertainment (NASDAQ: MPEL).

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>WYNN</strong></p> </td> <td> <p><strong>LVS</strong></p> </td> <td> <p><strong>MGM</strong></p> </td> <td> <p><strong>MPEL</strong></p> </td> </tr> <tr> <td> <p><strong>Market Capitalization (USD million)</strong></p> </td> <td> <p>11,290</p> </td> <td> <p>36,450</p> </td> <td> <p>5,200</p> </td> <td> <p>7,630</p> </td> </tr> <tr> <td> <p><strong>Net income (USD million)</strong></p> </td> <td> <p>596</p> </td> <td> <p>1599</p> </td> <td> <p>-600</p> </td> <td> <p>425</p> </td> </tr> <tr> <td> <p><strong>Operating margin (%)</strong></p> </td> <td> <p>-4.6</p> </td> <td> <p>23.3</p> </td> <td> <p>-12.1</p> </td> <td> <p>13.1</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>15.5</p> </td> <td> <p>1.1</p> </td> <td> <p>2.3</p> </td> <td> <p>0.8</p> </td> </tr> <tr> <td> <p><strong>Interest coverage</strong></p> </td> <td> <p>4.5</p> </td> <td> <p>8.4</p> </td> <td> <p>3.6</p> </td> <td> <p>3.5</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>22</p> </td> <td> <p>25.6</p> </td> <td> <p>N/A</p> </td> <td> <p>17. </p> </td> </tr> </tbody> </table>

LVS is the biggest company with a $36.4 billion market capitalization, and the smallest is MGM with $5.2 billion. Among the four, WYNN is the most leveraged company with D/E of more than 15x; however, the interest coverage of 4.5x means that WYNN can comfortable pay interest expense with its operating income. LVS has the most conservative and strong balance sheet with a 1.1x D/E ratio, and the highest interest coverage of 8.4x.

Among the four, LVS and WYNN derived most of its revenue from casino operations in Macau. For LVS, out of $9.4 billion revenue in fiscal year 2011, $7.4 billion was from casino operations; accounting for 75.4% of total revenue, and out of that $7.4 billion, $4.26 billion was from Macau, accounting for 57.6% of total casino revenue. And for WYNN, the total fiscal 2011 revenue was $5.27 billion, with the casino revenue of $4.19 billion, accounting for 79.5% of total revenue. A big chunk of casino revenue was from Macau operation also, of $3.57 billion, accounting for 67.7% of total revenue. LVS also has a big operation in Singapore with the Marina Bay Sands, and this operation brought to the company revenue of $2.36 billion, accounting for 31.8% of casino revenue in fiscal 2011.

For MGM, the company’s main operation is in the US, with 75% revenue from the domestic resorts. The rest was from MGM China’s operation. Its revenue segments seemed to spread out more evenly among the revenue of casino, rooms, food & beverage and entertainment. Out of nearly $5.9 billion domestic revenue, MGM had nearly $2.5 billion coming from casino operations, accounting for only 42.4% of total domestic sales. The company, which had the most percentage casino revenue out of total sales, was Melco Crown, with $3.68 billion out of $3.83 billion total, accounting for as high as 96%. And Melco’s main operation is solely in Macau, including City of Dreams, Altira Macau, Mocha Clubs and Taipa Square Casino.

The US gaming industry has slowed down, giving its golden time to Macau. In order to “surf” the casino growth in Macau, investors should consider LVS, MGM or especially Melco, not MGM as the majority of MGM’s revenue was from domestic resorts. MGM is expanding in China, Macau but I think it would take quite some time. LVS seems to be the best for investors when we take into considerations of both operating performance and leverage level. However, it is also the most expensive with 25.6x P/E. WYNN was significantly leveraged and still expensive at 22x P/E. That leaves us Melco, conservatively leveraged, good operating margin, comfortable interest coverage, and reasonably priced at 17.9x P/E. With the main operations in Macau, I personally think Melco is a stock for investors to surf the growth in the Macau casino industry. 

Know What You Own

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