Gamble Profitably on These 3 Casinos

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

The major casino businesses are risky for traditional investors. They either have too much debt, too much exposure to decelerating trends, or too much volatility. This, however, creates an opportunity for the long-term minded investors. These casinos are not going away any time soon and are taking numerous steps to expand and build. Their management teams are confident about the future and, by and large, heavily invested in that future. Below, I provide my outlook on some of the major casino stocks.

Don't Let China Get You Down On Las Vegas Sands (NYSE: LVS)

Over the last day, casino operator LVS has appreciated 13%. It is one of the most volatile stocks at a beta of 3.6 and is forecasted for 22.1% annual EPS growth over the next 5 years. Assuming LVS meets expectations, 2016 EPS will come out to $4.75, which, at a multiple of 17x, translates to a future stock value of $80.75. This ultimately provides 17% average annual returns and indicates the stock is worth $50.14 in present terms. Thus, while the company is not meaningfully undervalued, it is strong as a growth play under the assumptions that multiples contract from the high 27x level today. UBS has signaled a similar outlook with its recent "buy" rating and $50 price target.

A lot has been made of the company's future in Macau. But according to the company's billionaire founder Sheldon Adelson:

"The VIP market out of China is reputedly slowing down in Macau, although we're not experiencing that. [E]verybody I talked to says the same thing [about the Chinese.] They lie low where there's uncertainty… And the only uncertainty that people can look at is… how… the new government going to treat them. And once those issues have moved into the more certain column, I think we'll see a lot more VIP business coming back".

Moreover, Macau gambling revenue in the casino industry as a whole rose 7.9% y-o-y--at the high-end of expectations--as tailwinds from a rising consumerist population continue to pay dividends. Now, in the third quarter, LVS's Macau gaming revenue grew 19.3%, which actually represented a good acceleration over 14.3% last year. Market share has expanded 35% with a gaming win share of north of 20% in October. So, in short, LVS is growing faster than the market is. Add in a 26% y-o-y improvement in table productivity with $8,700 in winnings per mass table, and you have a solid company.

Furthermore, management has showcased a confident look at the future. It has built 2 casinos and added 3,660 hotel rooms in Macau since April. An additional 2,000 hotel rooms are planned in January 2013. In addition, the company is planning to build the Parisian Macau pending government approval. This will hopefully be opened by 2015's end. At the same time, the company is not pursuing a strategy of reckless empire building and has committed itself to only taking on projects that will provide a 30% return. Lastly, the 40% increase in the dividend payment should strengthen the market's outlook on this casino operator's long-term trajectory.


Wynn and MGM are considerably riskier investments than LVS. The former trades at a respective 21.8x and 18.8x past and forward earnings and is forecasted for a 14.1% earnings growth rate over the next 5 year. On December 14, UBS downgraded their outlook to "neutral" and slashed the price target from $129 to $118. MGM is still in the red and won't achieve profitability until two years or three down the road. However, it generates considerable free cash flow that is being overly discounted by the market. It currently has a very strong free cash flow yield of 11.5%.

There are several factors to consider for Wynn. A weak outlook on Macau, which represents three-quarters of business, is causing shareholders to overlook the company's major Cotai development and 13.6% return on invested capital. The Cotai resort is costing upwards of $4 billion but when finished will provide considerable upside. Investors have, however, myopically focused on macro growth trends that has decelerated for the seventh straight quarter in a row. For this reason, I recommend backing a company that has numerous catalysts being overshadowed right now.

With risk comes reward, and the latter for MGM is definitely being overshadowed by risk. MGM has a highly leveraged balance sheet but is taking meaningful steps to cut back. Interest rates of as much as 13% have weakened near-term profitability, which actually sets financial restructuring up to a major catalyst. Currently, the company is at work replacing the notes with 6.5% interest rate or cheaper debt and has successfully refinanced a third of its obligations thus far. In the meanwhile, MGM is, again, a free cash flow generator for a reason. As a purer play on Las Vegas, it owns the Bellagio, The Mirage, Mandalay Bay, and MGM Grand, among others, on the Strip. MGM Macau is one of the fastest growing assets and well complemented by Wynn on the Cotai Strip. Once it clears off the debt with stronger financing, investors will pay much more attention to the upside catalysts.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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