Some 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.

Casino stocks have been exciting to watch over the past few years, not only because of the evolution of the gaming environment in the United States, but because of the incredible boom in casino building overseas, particularly in Asia. However, the publicly-traded casino stocks are a very diverse bunch. I have written about the major casino players before, but after the recent gains in share price for some, and recent quarterly reports of others, now is a good time to revisit this sector to see which could make an exciting and lucrative investment for your portfolio.

Ambitious but still very speculative

MGM Resorts International (NYSE: MGM) has been the best performing casino stock of late, up more than 25% in the past four months. MGM owns and operates 15 properties in Nevada, Mississippi, and Michigan, with interests in several more properties. The company’s most well-known and impressive project is CityCenter in Las Vegas, which cost about $9.2 billion to complete and opened in 2009. The complex occupies 76 acres and includes the Aria Resort and Casino, several hotels, a large retail and entertainment district, and several condo buildings.

<img alt="" src="http://g.fool.com/editorial/images/62139/mgm-chart_large.png" />

The company's future growth plans are mainly focused on its Macau properties. In January of this year, MGM received approval to build its second resort in Macau, which will take about three years to build at a cost of $2.5 billion.

While I love MGM’s vision and what it has produced, as an investment, I simply can’t justify speculating in the company. The company has lost money in four of the last five years, and is expected to do so again this year. While the consensus calls for the company to produce a profit in both 2014 and 2015, there is a wide range of uncertainty among analysts who follow the company. In 2015, for example, estimates range from a loss of $0.21 per share to a profit of $0.95. Even in the best case scenario, MGM is trading for 16.8 times 2015’s earnings with no record of profitability or consistency.

A big player, at home and abroad

Las Vegas Sands (NYSE: LVS) is about 6 times the size of MGM and owns several casinos in Las Vegas, including the Venetian and Palazzo, as well as several casinos in Macau (China), Pennsylvania, and Singapore. The company has also submitted plans for six additional resorts in Asia, and the company’s future will be largely dependent on its success in the region.

<img alt="" src="http://g.fool.com/editorial/images/62139/lvs-chart_large.png" />

Despite the success that it has had in developing its brands, both at home and abroad, the company still has ambitious growth plans. Domestically, Las Vegas Sands has mentioned the possibility of a Florida resort, and has been continually expanding its Pennsylvania resort. Overseas is where the company's most ambitious project to date is just getting started: EuroVegas. The company announced last year that it had chosen Madrid as the site for the project, which is expected to take about a decade to complete six casinos, a dozen hotels, golf courses, shopping centers, etc. 

As the chart indicates, Las Vegas Sands has risen in the past month or so, but I still think shares are attractively valued. The company currently trades for 19.6 times this year’s expected earnings, which are projected to grow by 16.1% and 12.4% over the next two years. While it struggled through the financial crisis years, Las Vegas Sands has turned a profit for the past three years, and has built up its dividend to a yield of 2.55% annually.

Quality over quantity

Wynn Resorts (NASDAQ: WYNN) operates two of the most highly regarded Las Vegas casinos, Wynn and Encore, and also operates two casinos of the same names in Macau. Unlike the others, Wynn has not experienced a drastic gain in share price lately, and in fact, is trading for about 8% less than it was a few months ago.

<img alt="" src="http://g.fool.com/editorial/images/62139/wynn-chart_large.png" />

Wynn has been the most consistently profitable of all of the major gaming companies, turning a profit every year since 2006. In my opinion, this is a direct result of the less ambitious expansion plans of the company compared to the rest of the casino operators. The company operates the least amount of properties, with their fifth casino (third in Macau) currently under development. While this provides less dramatic earnings growth opportunity, it does add a degree of stability for its investors.

The company trades for a seemingly expensive 20 times this year’s earnings, and with a projected 10% annual growth rate going forward, it does seem a bit on the pricey side. It is worth considering that the company’s track record of solid performance, which does deserve somewhat of a premium. Additionally, Wynn is the best dividend payer of the bunch, with a yield of just over 3% annually.

More is not always better

The most recent on this list to become a publicly-traded company, Caesars Entertainment (NASDAQ: CZR), completed its IPO just a few years ago. While the company owns and operates more than 50 casinos, and is one of the largest gaming companies in the world (in terms of revenue), the company’s performance has been absolutely dismal, posting a loss of $11.95 per share in 2012. Things are not expected to get much better anytime soon, with losses of at least $4.75 per share expected over the next three years. 

<img alt="" src="http://g.fool.com/editorial/images/62139/czr-chart_large.png" />

Caesars has a slew of other red flags for investors, such as over $21 billion in long-term debt (the company’s market cap is just over $2 billion). Most of its debt is also at very high interest rates, and is in fact so bad that the current annual interest obligations are close to the company's entire market cap! Before expanding any further, I believe Caesars needs to focus all of its efforts on either restructuring or paying down its debt load.

I’m not trying to bash Caesars. I actually am very fond of the company’s resorts, and spent my 21st birthday at Caesars Atlantic City years ago. Having said that, I can’t even fathom a single reason to consider owning Caesars at this point, even for a speculative play. I don’t know, maybe someone else can explain the draw to me…why are people still buying this one?  I’m all ears!

Thoughts

Of these, the only two that make viable and responsible long-term investments at this point in time are Las Vegas Sands and Wynn. Wynn happens to be my preference due to its track record of performance, as well as the fact that its products (the resorts) are among the most highly regarded in the world. While the other two companies may indeed produce the best gains over the long run if everything goes perfectly, at this point in time, the odds don’t look very good.

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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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