Is it Time to Gamble on Casinos?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This past week as reported here, the Las Vegas Strip won $495.2 million for the month of November, translating into an impressive 9% year over year gain. Of course, these stocks have been in the doldrums in recent years due to the “Great Recession” and over-expansion during the boom years. Moreover, hopefully fools have transformed into “Fools” and realized that gambling is not a viable investment, but I digress :P. Let’s analyze the three publicly traded casinos with the largest presence on the strip: MGM (NYSE: MGM), Las Vegas Sands (NYSE: LVS), and Wynn Resorts (NASDAQ: WYNN).
MGM owns a number of well-known properties on the strip including MGM Grand, Bellagio, Mirage, Mandalay Bay, and its newest resort Aria. The company is down an astonishing 90% or so from its all-time high reached back in late 2007, but well above its lows reached in early 2009 of $2 per share as bankruptcy rumors were swirling.
The major shareholder is none other than Captain Kirk Kerkorian through his private equity firm, Tracinda, eloquently named after his two daughters Tracy and Linda. Now the company is sitting right near $12.50 a share and is showing some compelling value at a paltry 2.2x trailing P/E, .9x P/S, 1x P/B, and ROE of 50%. On the flip side, the company has a highly levered balance sheet with approximately $13.5B in debt against a negative net tangible book value of $1.8B. Average consensus estimates for next year expect the company to in fact lose $.39/share, and the company trades at a rather lofty 14x EV/EBITDA.
Moreover, MGM has a much smaller presence in the fast-growing Macau region compared to LVS and WYNN and is more dependent on this volatile Vegas market. So, while I like the comparatively cheap valuations and the ROE that MGM has generated the past 12 months, added to my great respect for Mr. Kerkorian, I have to shy away from MGM for now until I can better see their ability to cut down the heavy debt load and see more data in the upcoming months to truly show that Las Vegas is back on stable footing.
LVS is another company with a notable presence on the Strip, most known for the Venetian Resort and adjacent Palazzo resort hotel. LVS is headed by Chairman, CEO, and major shareholder Sheldon Adelson. The company has scorched higher since its lows in early 2009 back when it was under $2 a share and now trades at over $46. The company is relatively pricey at a 31x trailing P/E, 18x forward P/E, and 4.5x P/B and EV/S. However, the company trades at a relatively cheap .6x PEG, has a more manageable debt load than MGM, boasts a respectable ROE of 20%, and features a more diversified revenue stream with its large operations in Macau.
I still can’t say LVS is a buy though as it pays no dividend and trades at a pricey 13x EV/EBITDA. I’ll definitely keep it on my radar though, like MGM, as they both have high quality properties and are definitely a buy at the right price.
Wynn Resorts is named after its founder and current Chairman, CEO, and major shareholder Stephen Wynn. Its signature properties on the Strip are The Wynn and adjacent Encore resort hotel. The company has a majority of its revenue derived from Macau, which in current economic times and expected growth going forward is a big plus.
Moreover, the company trades at a nice .55x PEG, has far less debt at just over $3B compared to LVS and MGM, enjoys the strongest net cash position and lowest EV/EBITDA multiple at 11x, has a very nice ROE of 24%, and quite possibly best of all pays a dividend, and nice one at that at 1.8%. WYNN does trade at a rather high 27x trailing P/E, 19.5x forward P/E, and 5.6x P/B, but management has proven to be stellar and worth the premium. Moreover, the company has virtually no goodwill or intangible assets, much like LVS, making a valid case that they both are actually cheaper than MGM in a liquidation scenario.
Ultimately, I have to say that casinos aren’t showing as much value as I like to see, but the revenue gains may be a precursor to renewed growth, and getting in before the general market knows is where the big gains are to be had. I believe WYNN offers the best risk/reward scenario at this time for investors, and for gamblers all three of these holdings are far superior for your financial health.
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