Casino stocks are crumbling; should you buy or bail?

 

The past few years have been good for casino stocks, and that’s due in large part to their incredibly rapid expansion in Macau, an expansion made possible by the expansion of the Chinese middle class and the government’s easing of travel restrictions. All the big casino/resort stocks have capitalized on Macau’s growth, and while everyone agrees that it can’t continue at this pace forever, the market was taken very much off guard on Monday when numbers out of Macau came in well below expectation. Gaming revenue in Macau rose 12.5% year-over-year, while analysts had been predicting a gain between 17% and 21%. This raises an old question with some urgency: did the big gaming companies use the money from Macau to get their houses in order, or did they let themselves get sloppy as they feasted on easy profits? That can only be answered on a company by company basis, and that’s what I’ll be doing today.

Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Wynn Resorts (WYNN)

Wynn Resorts is closely associated with Macau for good reasons. The company gets more than half its revenue and by far the largest share of its growth from Macau. This hiccup in Macau’s growth probably means that current revenue and earnings estimates are a bit high, and that would be a serious problem if company’s valuations weren’t extremely low, but they are. WYNN shares have fallen from a high of $201.51 back in May to $154.14 today. That’s a decline of 23% in less than two months. Given current forecasts, WYNN has a forward P/E of just 15.86. If the problems in Macau were to cut this year’s growth in half—which is very unlikely—that forward P/E would still be less than 20, which is not bad at all. This great big dip is a great big buying opportunity.

Chart courtesy of www.stockcharts.com

Las Vegas Sands (LVS)

Las Vegas Sands, like Wynn, receives more than half its revenue from Macau. LVS shares are off only 12%, compared to Wynn’s 23%, but LVS shares peaked just two weeks ago, so the decline has been even more dramatic. Alas, the forecast for Las Vegas Sands isn’t quite as rosy. Prior to Monday’s bad news out of Macau, analysts were predicting only 7.4% revenue growth in 2018 for Las Vegas Sands as opposed to 11% for Wynn, so if the companies suffer the same degree of loss from Macau, the results will be more severe for Las Vegas Sands. If Sands had the better valuations, this might be a tough call, but the company’s pre-Monday forward P/E is already at 20, which is higher than Wynn’s is likely to rise post-Monday. Take WYNN instead of LVS for the bigger discount and better prospects.

Chart courtesy of www.stockcharts.com

MGM (MGM)

MGM is heavily invested in Macau, but not nearly as heavily as Wynn or Sands. For that reason, MGM shares fell only 3% on Macau Monday. However, MGM shares are down 26% from their high, which was back in January. That means they have fallen farther from their peak than WYNN shares and much farther than LVS shares. MGM is a harder beast to get a handle on, as they are as much in the capital allocation business as they are the gaming business. Having bought its way to dominance in Las Vegas, it also tried to buy its way into Macau, and while MGM China is a big player in Macau, MGM only owns 56% of it. MGM’s biggest investment in recent years (2009) has been the $9 billion development of CityCenter in Las Vegas. The company is partnered 50-50 in that venture with Dubai World. More recently, in 2016, MGM spend $900 million to fully acquire The Bortega casino from its former venture partner, Boyd Gaming. MGM also owns Mandalay Bay, which, in 2017, became the scene of the deadliest mass shooting in modern US history. Unsurprisingly, that caused the casino’s popularity to take a hit, and MGM’s management admits it has no real way of knowing how long business will remain depressed. While I feel MGM shares will eventually recover, I expect the recovery will take some time. Speaking for myself, I’d never buy into a company like this until it stops trading horses and shows me it can make money from operations.

Chart courtesy of www.stockcharts.com

Melco Resorts (MLCO)

Melco is a Hong Kong based gaming concern, technically a subsidiary of a larger Hong Kong entertainment company. Melco operates almost exclusively in Asia, and naturally, it has a large presence in Macau. The company also suffers from terrible timing, having opened a huge casino in Macau, the Morpheus, just seventeen days ago. So why, if it’s timing is so bad, would you want MLCO shares? Well, the company has consistently strong growth and the backing of a large parent company if for any reason things were to get dicey. Also, shares of MLCO were pummeled on Monday, falling more than 10%. That gives the company a forward P/E of just 15, though that will probably be higher once analysts recompute its likely profits in the coming year, based on post Monday knowledge of Macau’s strength. Shares of MLCO appear to be a good buy to me at this price, as it has plenty of value going forward. Also, if the problems in Macau turn out to be less dire than they seem (as they always have before) MLCO shares could make a very strong move to the upside. In other words, go ahead and take the red pill.

Chart courtesy of www.stockcharts.com

Caesars (CZR)

Caesars, formerly Harrah’s, has seen better days. It’s casino business declared bankruptcy in 2015, forcing the company to give up many of its holdings, but it still has quite a few. In addition to casinos, the company owns the World Series of Poker tournament brand and has been pushing into other online ventures as well. While the company is still in losses at present, it could benefit from the Supreme Court’s recent decision to allow states to legalize sports betting. Sports betting is now legal in New Jersey, Delaware, Nevada, Montana, and Oregon. Analysts believe Caesar’s will become profitable again in 2019, and that could drive the share price up, but there are serious risks here as well. If you really want to gamble on a turnaround, I suspect you can find better odds somewhere else.

Chart courtesy of www.stockcharts.com

Symbols: CZR LVS MGM MLCO WYNN
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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