LVS, Wynn, MGM All Attractive for Different Reasons
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Although I love casino stocks for their connections to emerging markets, I must admit that they are highly speculative and risky. Political risks aside, multiples are very elevated right now over growth prospects. Many commentators, however, are now starting to doubt some of the initial growth expectations - particularly in Macau and the Asian markets. I still recommend broadly diversifying, and here's why:
Even MGM Resorts (NYSE: MGM), which I believe has the worst risk/reward, has had simply too much of a sell-off from weakening revenue trends in Macau. In the longer-term, China is heading towards greater prosperity; but, even if it doesn't, Las Vegas should shift investors's attention to something more promising. Over the years, MGM has entered the red, bled millions, and had little clarity in site for a recovery. Now that Las Vegas is returning to normalcy, albeit slowly, MGM will be the main beneficiary in room rates and convention volumes.
At the same time, MGM has also delivered on shareholder expectations to clean up the balance sheet following the Chapter 11 concern in 2009. It is still nevertheless highly leveraged, so capex will remain conservative as obligations are being met. In regard to MGM's Cotai, while the project is some time off, it should help keep investors optimistic should Las Vegas and Macau both underperform expectations.
All in all, MGM has a terrific asset portfolio that would also be attractive to an acquirer. After selling a 50% stake to Dubai World in a $2.7 billion transaction, it owns CityCenter, which is a major mixed-use development on the Las Vegas Strip. After being forced to raise $2.5 billion in emergency capital, CityCenter was opened near the end of 2009. The timing was poor, but it nevertheless remains a major catalyst for value creation going forward.
As far as risk goes, MGM is in the most precarious position. If you want greater safety, back Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN). Analysts are optimistic about both stocks and have recently upped consensus EPS estimates. An emerge of 26.7% annual EPS growth rate over the next 5 years is forecasted for LVS. Although this sets the bar high, LVS has delivered better-than-expected performance in recent months. Should it just meet expectations (that have been made more bearish following concerns of a slowdown in China) and trade at 16x (well below the current multiple), the company would be worth almost $57 per share at a 10% discount rate.
The casino operator is led by the richest man in the industry, Sheldon Adelson, so there is plenty of reason to be optimistic about management. Cotai Central development has been soft, and it is particularly disconcerting that slowing Macau growth may be indicative of business cannibalization. At a beta north of 3, the stock could swing dramatically either up or down. In my view, it is better positioned to go up than down when the firm continues to outperform expectations as global markets overall recover. Many investors are on "wait-and-see" mode due to the high multiples - strong performance and a focus on developing new projects will help to increase shareholder value.
In terms of risk, Wynn is somewhere between MGM on the danger side and LVS on the "bright-and-sunny" side. 16.1% annual EPS growth is forecasted over the next 5 years - less than what is the case for LVS. Its PEG ratio is still greater than 1, which indicates that growth has been more than factored into the stock price over the immediate term. If Wynn continues to deliver double-digit EPS growth, it is likely that multiples will elevate even more - closing the gap to those of LVS.
While VIP share losses may be disappointing, Wynn is about to be done with a decade's worth of development that will attract consumers when the economy moves closer to full employment. The reason why the business is so dependent on a full recovery is because the casinos are the highest-end and thus will not attract gamblers who already feel penny pinched. Only when the economy is in full gear will consumers feel relevant in a classy environment. Accordingly, I recommend betting in favor of Wynn as a macro bet on a sharper-than-expected turnaround.
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