Stay Away From MGM And Buy LVS, Wynn
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Casino stocks are some of the toughest bets: they trade at high multiples, are subject to political instability, and are very volatile. In my view, however, the reward largely overweighs the risk. Las Vegas Sands (NYSE: LVS), for example, is led by top management and has excellent exposure to high-growth emerging markets. Ditto for Wynn Resorts (NASDAQ: WYNN), which is even cheaper than the aforementioned competitor. MGM Resorts (NYSE: MGM), on the other hand, is in the bleeding territory and remains highly uncertain despite being near its 52-week low. Below, I review the fundamentals of each company.
Las Vegas Sands and Wynn
LVS trades at a respective 24.5x and 15.7x past and forward earnings with a dividend yield of 2.4%. Wynn, however, trades at 20.1x past earnings but has a 1.9% dividend yield. Both companies are led by billionaires who are experts in the business. Let's look at the fundamentals to get a sense of where each firm is heading.
Free cash flow for the TTM ending 2Q12 was $1.5B for LVS versus $745M in 2Q11 and -$1.2B in 2Q10. That's an impressive turnaround from a challenging time period. For Wynn, FCF for TTM ending 2Q12 was $1.1B versus $1.3B in 2Q11 and $423M in 2Q10. So, Wynn has had not as impressive as a turnaround in FCF. Profit margins have been very volatile but trended up to the 10% range for 1H12, which is better than what was seen in 1H10 but worse than what was seen in 1H11. Profit margins at LVS have done much better hovering to the 13% range since 2011 began - also much better than the preceding few years.
Thus, when it comes to the fundamentals, I recommend LVS. In terms of opportunities, both companies are well positioned to gain from rising consumer expenditures abroad. I believe that the market has been too pessimistic about slowing demand from Asia when the secular trends are all pointing up (more or less). But I am, again, particularly optimistic about LVS due to its targeting the mass table market. The business is opening phase 2 of Cotai Central sometime later this month, and management has maintained its optimistic guidance for Macau.
About Macau: LVS will be able to maintain strong revenue through new hotel rooms and operations. There have been some red flags raised about money laundering, but I believe that this will only drive appreciation since it is very unlikely that anything will be proven (to say nothing about whether it happened in the first place). July Macau market was soft with market win up 1.5%. However, August trends look very bright with the figure tracking towards 7% or better. Combined with the growth trajectory for Cotai Central and reduced exposure to Macau, LVS is easily a buy. I recommend supplementing an investment with one in Wynn to hedge your bets.
In my view, the risk outweighs the rewards for MGM. While the company is recovering in Las Vegas and has potential developments in Cotai, its debt makes the firm riskier than peers. Cash flow trends have been fairly weak with $739M cash flow in 2008 versus $675M in 2011. While capital expenditures have fallen significantly and led to positive free cash flow, CAPEX is ultimately an investment in the future. As the economy recovers, MGM is thus not as well positioned to outperform as its stronger peers are.
Over the years, MGM has made large bets on Las Vegas and China, but those bets have come at the wrong time. Debt-to-equity has surged to 2.3 and the interest expense is worse than the debt during the terrifying 2008 days. The company will likely be pushed into selling off assets to meet obligations, which will put considerable pressure on the underlying fundamentals. From a competitive standpoint, assets are king in the casino business - without them, there are fewer places to gamble and generate revenue for the business. I thus recommend holding out until greater visibility emerges over the financial position.
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