1 Casino Stock To "Buy", 2 To "Hold"

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

Ever since signs emerged that China was slowing down, casino stocks have started to tumble. However, going with the herd can be very dangerous. In my view, double-digit gaming revenue growth from Macau indicates that the fundamentals are holding up. While they may slip a little, stocks have become overly discounted against the prospect of rising business from new project developments. Below, I review three casino stocks to consider.

Las Vegas Sands (NYSE: LVS): Go With The Analysts And Buy

Despite the dramatic decline since the mid-April local high, Las Vegas is still an excellent growth stock. Analysts forecast 24.3% annual EPS growth over the next 5 years, which will put 2016 EPS at $5.20. At a 17x multiple, this translates to a future stock value of $88.40 - more than doubling any initial investments made right now, on top of a 2.2% dividend yield.

How much is $88.40 worth in present terms? To get that figure, you would discount the future stock value by an appropriate rate, say 10%. That discount rate implies a present value of $54.89. Yet the stock is only valued at $43.61. There is thus a strong margin of safety that is overclouded by the beta of 3.6. Imperial Capital recently put a $62 price target on the casino company in its "outperform" Aug. 22 report.

And for good reason. Las Vegas Sands has dramatically increased free cash flow over the years. For the twelve trailing months ending 2Q 2010, the company lost $1.2 billion in free cash flow. Two years later, it was generating $1.5 billion in positive free cash flow. This turnaround easily merits opening a long position.

MGM Resorts (NYSE: MGM) & Wynn Resorts (NASDAQ: WYNN): Both "Holds"

Over the last six months, Wynn has fallen by 10.5%, which is at least 1,770 bps better than the decline of LVS. With shares still elevated at 22x forward earnings and a high bar set at a 16.9% annual EPS growth forecast, I recommend holding out. Ditto for MGM, which has continued to fall but now trades below book value.

On a fundamental level, I find that Wynn is more attractive than MGM. For one, it is not losing money, and its ROE and return on invested capital have been on the rise. The addition of the Cotai resort  has also yet to be appreciated by the market, which is myopically focused on the upwards of $4 billion in expenses. The negativity on a slowdown in China also showcases the market's  focus on quarter-to-quarter event. In the long-term, China looks very lucrative thanks to a rising middle class.

Macau represents roughly three-quarters of Wynn's business and, though it has declined by 7.1% in the recent quarter, the fundamentals are still heading in the right direction. Cost reductions and expansion elsewhere will generate brand appeal to draw in gamblers. After posting an 11.6% decline in revenue, Las Vegas (the city, not the stock) is more of a long-term headwind for the firm. Competition continues to put pressure on market share.

Reports that Macau gambling revenue growth fell to 12.3% in September sent jitters across the market. However, this was surrounding the period of China's national holiday and is thus more indicative of a local weak point than anything else. MGM is ultimately the most vulnerable to uncertainty, and it has reportedly been carefully tracking visitor levels to decide on a suitable path forward.

Unfortunately, momentum has been working against MGM. In the most recent earnings call, management reported a disappointing $0.30 per share, which was twice as bad as analysts expected. One-time events dragged down results, however, and obscured the better-than-expected returns from Macau and positive outlook on a bookings turnaround. Despite this I recommend holding out until debt levels and capital expenditures come down.

Want to Learn More?

For many companies, successfully capitalizing on a booming Chinese economy is like winning the jackpot. That's literally the case for gaming company Las Vegas Sands, which made a big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in The Motley Fool’s brand new premium report on Las Vegas Sands. They're providing a full year of analyst updates to go with it, so make sure to claim your copy today by clicking here.

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