Time to Bet Big on This Casino

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

Casinos were hit hard by the recession following the 2008 financial crisis and investors have yet to warm up to them again. However, in addition to growth opportunities in Asia, casinos should benefit from a rebound in the U.S. economy. The industry as a whole should do well over the next few years, but the investor who picks the best casino will earn the highest return.

Similar on the Surface

On the surface, Wynn Resorts (NASDAQ: WYNN), Las Vegas Sands (NYSE: LVS), and MGM Resorts (NYSE: MGM) have similar economics. They earn similar margins and returns on capital despite appealing to different customers.

However, the opportunities and weaknesses vary greatly for each. MGM Resorts will benefit the most from a recovery in the U.S. economy, which should lead to higher tourist levels on the Las Vegas Strip. The firm's significant fixed costs and low maintenance capex requirements should amplify the effects of a recovery. In addition, MGM's new CityCenter resort is expected to become much more profitable for the company in the comping years, boosting the bottom line. However, MGM's growth potential is limited by its heavy debt burden. While Wynn Resorts and Las Vegas Sands have the balance sheet to expand in China, MGM will have to use free cash flow to pay down debt before expanding. Therefore, MGM does not look like a good bet for 'best casino stock to buy.'

Las Vegas Sands does have a clean enough balance sheet to borrow and expand into the Asian markets. It holds one of two licenses to operated in Singapore, in addition to its license to operate in China. Together with Wynn, Las Vegas Sands earns slightly higher returns on invested capital than MGM. The company is primed to do well financially over the next few years, but at a 27x free cash flow and nearly 12x EBITDA, the Las Vegas Sands is not cheap enough to invest in today.

Wynn Resorts, on the other hand, looks like a fantastic investment at a recent price of ~$110.00 per share. Like Las Vegas Sands, Wynn has a license to operate in China and a balance sheet to make significant investments. However, the company has made significant capital expenditures in the past and does not have any major capital spending planned in the immediate future, so expect Wynn to produce more than $1 billion in free cash flow annually for the foreseeable future. In addition to growth in China, Wynn will benefit from a rebound in luxury spending as the United States economy recovers. The company attracts more luxury spending than MGM Resorts and Las Vegas Sands, so it stands to benefit more as high-income tourists start spending money again.

Valuation

After making significant capital expenditures over the last several years, Wynn is finally producing hundreds of millions in free cash flow. It earned $774 million in free cash flow in 2010 and $1.33 billion in 2011. Expect this trend to continue as it grows revenues with little additional investment. The stock currently offers an 11.5% yield on $1.3 billion in free cash flow. If you put a 15x multiple on $1.3 billion, you get a per share value of $194. The stock recently traded for $112.49, so investors should expect to do well owning the company over the next few years. But more importantly, there is plenty of room for error before investors lose money at this price. So, while the industry as a whole should do well, Wynn Resorts offers the best value proposition.


titans8904 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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