1 Casino Stock to Buy, 1 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.
While only MGM Resorts is generating millions in losses, its struggles are emblematic of the risk inherent in casinos. While everyone likes to say that the "odds are in the house's favor," "the market has not been in the house's favor" in recent years. Las Vegas Sands and Wynn, for example, have lost more than two-thirds of their value over the last five years. MGM is down 89%. Has this bearish trend overly beaten down casino stocks?
Las Vegas Sands (NYSE: LVS) Undervalued
It has been no secret that I have been a fan of Las Vegas Sands for some time. While the company may seem expensive at 26.2x past earnings, in my view, it is bound to appreciate off of the bears being proven wrong over Asian growth. Over the last twelve months, the stock has gone up and down but ultimately made no progress. As the new casinos move out of development and into operations, growth prospects are likely to be exceeded given the market's tendency to think in terms of "what have you done for me recently?"
Analyst Melco Crown has been particularly optimistic on the outlook of Las Vegas Sands relative to its competition. Melco Crown expects LVS to generate the greatest earnings growth in Macau. I am equally optimistic about the company's endeavors in other emerging markets. Rumors are that it is going to banks to develop a resort in Spain. While the bears may bet the stock down in the short-term due to capex woes, in the long-term, it will pay off from a growing consumerist population abroad. If China's Golden Week sales growth of 15% is of any indication, the company can perform well even on off days.
With around 85% of the business leveraged towards Asian gaming, it stands to gain big from stimulus programs that are being implemented in China. Singapore, which is one of the strongest economies in the world, has two major casinos - one of which is run by, you guessed it, LVS. I expect the company to increase its dividend yield and share repurchase program to encourage investors to sit through the high capex periods and take a confident outlook on the future, as they should.
Wynn Resorts (NASDAQ: WYNN) Slightly Expensive… A "Hold"
Wynn Resorts is an excellent casino operator, but it is less attractive as an investment than LVS. It trades at a respective 22.5x and 18.7x past and forward earnings with a dividend yield of 1.7%. Analysts forecast it to grow EPS by 15.6% annually over the next five years.
Assuming Wynn meets expectations, it will generate 2016 EPS of $9.52. At a multiple of 19x, the future stock value ends up being $180.88. Discounting backwards by 10% yields a present value of $112.31 - slightly under the current market price. Accordingly, I believe that analysts are justified to rate it a "hold."
The overvaluation wouldn't be so bad if the company weren't a poor performer of late. In the last five quarters, management has missed expectations four times by an average of 4.9% when those misses occurred.
On the positive side, free cash flow has dramatically turned around from hundreds of millions in the red between 2007 and 3Q09 to $1.1 billion for the TTM ending 2Q12. That's a pretty good turnaround, since free cash flow is now at a 9.5% yield against the market capitalization. This mixture of strong returns but inadequate growth prospects renders Wynn a "hold."
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