The Care And Feeding Of Whales-A Guide To Casino Stocks
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A little known-but fascinating risk in casino investing is the "whale," a gambler who can drop thousands on a single hand without batting an eye. Tales of whales are legendary, like late Australian billionaire Kerry Packer's $26 million win over a couple hours at MGM Resorts (NYSE: MGM) -- a win so large it hurt the quarterly earnings of MGM in 1995.
Whale Hunt In The Desert is the true story of Steve Cyr's glory days as a Vegas casino host in the nineties. The book goes into great detail about the "comping" of trips, free play, lavish suites, gourmet dinners, tickets to the biggest events, and "other" perks that the biggest gamblers get for their play. These comps can be worth hundreds of thousands of dollars. Casinos have this down to a science, with risk/return formulas of how much a whale has to play to merit comps. With computerized records of a whale's past play and instant credit checks, there are few surer bets now for the house.
Whales of The Asian Persuasion
The Asian whales have long received the most preferential treatment, and the big casinos have staff entirely dedicated to them. Now that casinos have operations in Macau and Singapore, these Asian whales are more important than ever, with the junkets' revenue reports as important to stateside investors as meetings and conference numbers.
The three big players in Vegas and Asia are still Las Vegas Sands, (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), and MGM. You may wonder: Why are these Asians so important, and why do they love to gamble so? The same book gave a reasonable explanation that Western gamblers, particularly Americans, have this Puritan mindset about gambling, they don't call them sin stocks for nothing. In Asia, to oversimplify, it's a Hakuna Matata Circle Of Life philosophy that the money flows in, the money flows out and there is nothing immoral about it.
Wynn is at a disadvantage to rival Las Vegas Sands in Asia with only two properties and just beginning a project on the Cotai strip. Las Vegas Sands has three casinos in Macau and one in Singapore. MGM has the one Asian property, MGM China, and they will have a grand opening of another casino on the Cotai Strip in 2016.
The Fundamentals of Fun
Of these Wynn may be most fairly valued if the lower P/E of 24.45 is any indication. The yield stands at 3.40%. Wynn also gives special dividends every so often similar to what casino hosts call show-up money, a little cash just for patronizing their tables.
Wynn has barely moved over the last year, only up .70%. Expecting to make up for that with another special dividend like the Christmas windfall of 8.00% going forward is a sucker's bet. Another problem with Wynn is that the company is so tied to namesake Steve Wynn and his vision that a succession plan is always an issue. Elaine Wynn holds 9,659,355 shares as the second largest stakeholder behind Waddell & Reed Financial's 14.91% stake of 15,039,402 shares and is the likely reason for the high risk corporate governance rating for shareholders' rights.
Wynn's return on equity is an impressive 49.53% and the operating margin is 19.97%. It has almost twice as much total debt to total cash. The company reported a net revenue decline on the February 4 earnings release for Q4 and most of that revenue decline was from Macau. Also of concern was the decline in EPS from $4.88 in 2011 to $4.82 in 2012. The whale numbers are usually folded into the VIP table games turnover number and that number was down 6.6% for Macau high rollers.
Las Vegas Sands has underperformed Wynn, down over 5% over the last year and is trading at a higher P/E of 27.25 with a lower return on equity of 18.85%. Corporate governance risk is high for shareholders' rights here as CEO Sheldon Adelson, family members, and an Adelson family trust own over 250 million shares contributing to an insider hold of 52.45%. If you buy into Las Vegas Sands you have to believe in Adelson. That has worked out just OK for shareholders with a 2.00% yield and its Christmas windfall dividend (Adelson got his cut) leaving them even or possibly up a little this last year. And as with Wynn Resorts, succession is a concern.
Finally MGM is the underdog down over 13% in the last year just reporting a loss of $2.50 per share compared to a year ago quarter loss of $0.23. The February 20 Q4 report highlighted some expenses of development, a MGM China special dividend, and other impairment charges.
Surprisingly, table turnover was up more than 6% for MGM China with net revenue of $731 million. Not bad for a relative newcomer to Asia. MGM should be considered the speculative name of the Asian casinos.
When Whales Lose You Win
Overwhelmingly, whales lose money. For the biggest whales, it's the cost of a good time. But remember when they win big it can hit the bottom line.
Unfortunately, huge wins are rarely broadcast by the casinos before earnings. If you're not there at the tables you probably won't know and just have to go on fundamentals like the rest of us guppies.
Of these three Wynn looks like the best bet ahead but MGM may have some earnings momentum for next quarter with Chinese New Year comps and one time charges in the rear view mirror. Las Vegas Sands used to be my favorite casino stock but the tables may be hotter at the other two right now.
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