Are Casino Stocks Becoming Less of a Gamble?

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

Casino stocks have always been a favorite of mine (to watch, not necessarily to buy). Having grown up near Atlantic City, I grew up in the gambling culture, and was fascinated both by the atmosphere created by casinos and the business itself. For some reason, a business where people come in and voluntarily give you their money seemed appealing! 

The stocks of casino companies have been somewhat of a gamble over the years. For instance, Atlantic City-based Trump Entertainment went bankrupt several years ago, leaving shareholders with nothing. During the recent financial crisis, all casinos got hit hard, and shares of my personal favorite casino company, Las Vegas Sands (NYSE: LVS) sunk to a low of $1.38 at one point. Fast forward four years, and Las Vegas Sands is now a much healthier and more stable company. Shares trade for about $56 and pay a nice dividend of $1.40 annually, more than the stock was worth at the lows. I guess you could say that those who had the foresight to buy at the lows really hit the jackpot!

About Las Vegas Sands

My silly casino jokes aside, Las Vegas Sands really has done a phenomenal job of turning itself around. In fairness, the share price never should have dropped quite so much, but in early 2009, the market acted as if the sky were literally falling on anything related to discretionary spending. 

Las Vegas Sands operates some of the most well-known Vegas casinos, including the Venetian, Sands, and Palazzo. They also have ventured into Asia, with the Venetian Macau, Sands Macau, and Four Seasons Macau. It is interesting to note that all of those were open before the financial crisis, and the amount of leverage on Sands’ balance sheet as a result of these is one of the main reasons their stock was treated particularly harshly by the market. 

The company also operates a casino in Pennsylvania, and opened a resort in Singapore a few years ago called the Marina Bay Sands. Altogether the company’s revenues have climbed tremendously, from under $700 million in 2003 to over $13 billion expected this year.

A Stable Casino Company? No Way!

While there is really no debating the fact that Las Vegas Sands has a lot of debt on its balance sheet (and the debt level has increased in recent years as the company finances new projects in Asia), $10 billion in debt with $3 billion in annual revenues, as the company had in 2007, is a completely different thing than $10 billion in debt with over $11 billion in revenues. One scenario is sustainable and one is not. Additionally, just recently the company approved a $2 billion share buyback plan, which is generally a sign of a company of improved health.

Due to the success of their ambitious expansion over the past decade or so, Las Vegas Sands trades for a relatively high P/E ratio of 27 times last year’s earnings. However, if the company is able to meet the growth projections that analysts have made, this is actually fairly cheap. The company is expected to earn $2.81 per share for 2013, increasing to $3.20 and $3.69 in 2014 and 2015, respectively. This corresponds to a 3-year annual earnings growth rate of over 20%. If the popularity of casino gaming continues its growth in popularity, particularly overseas, there is no telling how big this company could get over the long run.

Alternatives

In terms of market cap, Wynn Resorts (NASDAQ: WYNN) is about one-fourth the size of Las Vegas Sands, with slightly less ambitious overseas expansion. Wynn operates the Wynn Las Vegas, Encore at Wynn and Wynn and Encore Macau. The company also has another resort planned for Macau, set to open in 2016. Wynn has had very impressive revenue growth and has a similar debt load to Las Vegas Sands, relative to its size. Wynn trades for just under 24 times last year’s earnings, and is projected to grow its earnings at about 14.8% annually going forward.

MGM Resorts (NYSE: MGM) is the third largest publicly traded casino company in the U.S. and is about half the size of Wynn by market cap. MGM’s casinos are mostly in Las Vegas, where the company operates 10 casino/hotels on the strip including the $8 billion City Center project. MGM actually has higher revenues than Wynn at about $9 billion per year, but the company has struggled to turn a profit, having posted negative earnings in four out of the last five years, and is also projected to report a small loss this year. Earnings are expected to turn slightly positive in 2014, but the lack of profitability over the recent past is one of the main reasons shares trade at such a discount in terms of revenues and number of casino resorts.

Conclusion

While MGM could very well produce the best long-term gains out of the three, it is nothing more than a speculative play at this point. As far as the other two go, it seems like a few of the historically volatile casino stocks are starting to look like legitimate investments, with Las Vegas Sands looking like a slightly better value at the moment.

For many companies, successfully capitalizing on a booming Chinese economy is like winning the jackpot. That's indeed the case for gaming company Las Vegas Sands, which made a big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our premium report on Las Vegas Sands. Be sure to claim your copy today by clicking here.


Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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