A Look at Three Casino Stocks

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

The revenue from gambling in the Chinese territory in December, 2012 spiked up as the casinos in Macau ended the year on a high note with 19% increase in revenue. This growth is above the consensus estimate of 17%. And, among the publicly traded companies in Macau the table-only December market share up to 25th came as follows:   

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>December (first 25 days)</p> </td> <td> <p>November</p> </td> </tr> <tr> <td> <p><strong>Wynn Resorts</strong> <span class="ticker" data-id="206199">(NASDAQ: <a href="http://caps.fool.com/Ticker/WYNN.aspx">WYNN</a>)</span></p> </td> <td> <p>9.50%</p> </td> <td> <p>12.20%</p> </td> </tr> <tr> <td> <p><strong>Las Vegas Sands</strong> <span class="ticker" data-id="206261">(NYSE: <a href="http://caps.fool.com/Ticker/LVS.aspx">LVS</a>)</span></p> </td> <td> <p>20.60%</p> </td> <td> <p>20.30%</p> </td> </tr> <tr> <td> <p><strong>MGM Resorts</strong> <span class="ticker" data-id="204450">(NYSE: <a href="http://caps.fool.com/Ticker/MGM.aspx">MGM</a>)</span></p> </td> <td> <p>10.50%</p> </td> <td> <p>9.30%</p> </td> </tr> </tbody> </table>

Let’s put some light on these resorts’ performance:
Wynn Resorts: Shares of the company rose by 5% in December but the revenue growth in 2013 is expected to be modest as Wynn saw a double digit decline in its VIP volume y/y in 3Q12. This volume is further expected to go down by 5% to 7% in 2013 because of the limited VIP rebound. Wynn is much more dependent on its VIP market for its revenue and overall the Macau market is expected to see only 2% increase in 2013 in the VIP market. On the other hand the overall mass market is expected to grow by 18% but Wynn is unable to take advantage of this increase as it has not added much capacity in the mass market. The Company’s much talked about Cotai project which is estimated to cost around $4 billion was originally scheduled to open in 2016. But now the project is getting delayed and will be extended to 2017 because the ground work is taking longer time than the expectation. Moreover, the Macau market has become extremely competitive with the opening of Sands Cotai Central by Las Vegas Sands as it gives higher discounts, Credit extension and free play to the customers. Wynn is not taking part in the discount race and as a result it is ultimately falling back in some of the hot market trends. But one thing that can keep the investors’ interest alive in Wynn Resort is its strong free cash flow and a robust dividend payment policy. The Company paid $8/share in November 2012 and has announced its intention to double its quarterly dividend from $1 to $2 in 2013. The company is expected to capture ~11% market share in 2013.

Las Vegas Sands: This Company reported an 18% decline in its profit mainly because of its underperforming Singapore casino. But due to the slight increase in VIP gaming and also with the stabilization in the mass market this decline may be stopped with an expected growth of 8% against the previous estimate of 5% in 2013. Moreover, the company’s marketing efforts are also being ramped up. These efforts include increased casino sales representatives, aircraft to fly in the high-rollers, and shows. LVS is the biggest beneficiary of the mass market increase because of its most underutilized mass capacity in Macau and as it holds a dominant position in this market being the largest developer of the important Cotai Strip. The Gaming Growth Rate (GGR) in Macau is estimated to increase 11% to 13% in CY13 creating significant opportunity for LVS. Further its Sands Cotai Central promises to live up to the expectations as its second phase bodes well with its variety of offerings and a huge inventory of hotel rooms and suites. It saw a record number of visits which was reportedly 500,000 in just three days of its opening. And once the Sands Cotai Central property is fully occupied with the completion of the connector bridge from the Venetian/Four Season the company is expected to see more additional visitors. Also, the company will be least affected when the 50% smoking ban takes effect from the 1st of January 2013 as it has the most underutilized smoking tables as compared to its peers.
MGM Resorts: This Company has finally received an approval for its $2.5 billion Macau casino on the Cotai strip from the officials which is expected to be started in 2016. The casino will feature 1600 rooms, 500 gaming tables and 2500 slot machines with further planned addition of restaurants, retails and other entertainment. It has now entered in direct competition with the Las Vegas sands and Wynn resorts. MGM announced on Friday a major refinancing deal in which it will be replacing roughly $4.4bn of old debt with a new $3bn credit facility and a $1.25bn new debt issuance. This deal is estimated to lower the interest expenses of the company by $200m annually and extend the average maturity from 2016 to 2017. This will improve the company's balance sheet till 2015 and also provide it higher financial flexibility. The stock of the company increased 18% in the last one month.
To conclude, I feel that among the three resorts discussed above, the Las Vegas Sands is the best to be considered for long term investment because of its well established position in Macau and with its GGR increase. On the other side, Wynn resorts can be considered for short term investment taking its dividend policy in consideration. While for MGM resorts, I am still on a hold.

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