Which Casino Stocks Are Worth the Gamble?

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

When it comes to casinos and gaming stocks, they all have a few things in common.  All are rated “high risk” by analysts and carry an above-average level of volatility.  All have earnings that tend to fluctuate wildly from year to year.  They are also all potentially very lucrative.  For example, Wynn Resorts (NASDAQ: WYNN) was trading as low as $14.50 as recently as 2009, and two years later in 2011 reached a high of $172.58.  I don’t know about you, but the risk just may be worth the reward. 

We’re getting ahead of ourselves.  I’d like to examine the “big three” of publicly traded casino companies and determine which, if any, is best positioned to deliver a substantial move to the upside.  Our candidates in no particular order include:

1.) Wynn Resorts

As mentioned above, Wynn has had an outstanding run since its lows of 2009.  However, it has pulled back considerably from its highs, and some analysts seem to think it has room to run.  Like most casino operators, the next area of growth seems to be Macau in China.  The company opened Wynn Macau, its first Chinese property in 2006, and followed it up with Encore in 2010.  Wynn currently has applied to develop an additional 52 acres of land in Macau. 

Currently Wynn trades at 21.5 times TTM earnings, which are expected (by consensus estimates) to grow to $6.05 and $6.82 per share in 2013 and 2014, respectively, up from $5.46 for 2012.  This translates to year over year growth of 10.8% and 12.7%, which may or may not justify the high P/E ratio.  However, this is at the low end of historical levels.  Additionally, Wynn pays a 1.76% dividend yield, in addition to special dividends of between $4.00 and $8.00 per share paid 5 out of the last 6 years, creating very nice income for shareholders, a rarity among casino stocks.

2.) MGM Resorts International (NYSE: MGM)

The smallest of the three companies profiled here by market capitalization, MGM is unique because it is the least dependent on China for future growth.  MGM owns and operates 10 casinos on the Las Vegas strip, including the multi-billion dollar City Center.  It is a partner in joint ventures including the Borgata in Atlantic City, and the MGM Grand Macau.  MGM’s efforts are yet to bear fruit for investors, as the company has not had positive earnings since 2007, making a P/E analysis not meaningful. 

Additionally, the company has cash on hand of approximately $2 billion and $13.5 billion in debt, which could be a huge red flag for investors.  While MGM could possibly produce the best growth of the three, it simply seems too risky until the company demonstrates it can actually earn money from the ambitious projects it keeps undertaking.

3.) Las Vegas Sands Corp. (NYSE: LVS)

By far the largest of the three by market cap, Las Vegas Sands has had quite a roller-coaster ride over the past several years.  Trading at $45.79 as of this writing, this stock could have been bought in 2009 at the fire-sale price of $1.38 when the whole world thought casinos were all going bankrupt.  I myself bought in at around $2.00 in 2009 and sold for $5.00 just weeks later, thinking I was a genius!  Anyways, the company operates several high-profile Vegas casinos, as well as three in Macau.  Having been the most ambitious of the three in terms of Chinese market entry, the Sands Macao was the first Vegas-style casino to open in Macau in 2004. 

Sands has produced positive earnings throughout most of the last decade, with the only two negative years being 2008-09.  Sands currently trades at 26.8 times TTM earnings, which sounds expected until you account for the consensus estimate of a 15% annual growth rate for the next three years.  Sands also recently started paying a dividend of 2.16%, and a special dividend of $2.75 this year, as a lot of companies are doing for tax benefits.

The Bottom Line

In conclusion, I would say that Wynn or Sands could both be good investments, provided you are bullish on the gaming industry, and particularly Chinese gaming.  I believe Wynn looks like the most shareholder-friendly of the three due to its great record of special dividends.  In fact, including those special dividends, Wynn has provided shareholders with an average yield of 7.4% since 2009.  This is a very nice yield for any company, and especially nice for one with the potential upside of Wynn.

KWMatt82 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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