29 July, 2007

Gambling on gambling: Investing in Casino Stocks

Red, Black, Hit, Stand, the sound of slots ringing in every direction. The magic and lust of the casino. Las Vegas is an adult playground for sure, but is there money to be made when you're not at the table getting free drinks and losing another hand at blackjack? Perhaps you have an unbeatable strategy for Roulette, or maybe some Texas Hold 'Em is more your style, or maybe you're a sports nut and know the intangibles that will beat the bookies? Either way the casinos profit, and barring a real life Ocean-esque crew knocking over half of Las Vegas they'll continue to profit.

As a gambler, you might know some Casino names like the Bellagio, MGM Grand, The Luxor, Mirage. All owned by MGM Mirage (MGM). Harrah's Entertainment (HET) operates 48 casinos including Harrah's and Caesars Palace. Las Vegas Sands (LVS) operates The Sands and The Venetian, among others. But Vegas isn't the only party anymore, and to be a player in the expanding world of casino entertainment you need to be in Macau. This worldly entertainment center in Asia has exploded over the years as the large Vegas casinos migrate over to cover both ends of the world. But that's not the only place these firms are looking, Europe, Singapore, you name it they are thinking of expanding there.

So where do the investment opportunities lie? Well there's all kinds of buying and selling rumors hitting this sector of late and the one left out of the party seems to be the Donald himself. Trump Entertainment (TRMP) was on the block but reported being unable to find an attractive offer. Regulations problems have also plagued the company of late as it was denied a license in Pennsylvania. These troubles have led shares downwards from the 20s to $7 and change over the past year. Harrah's was in talks and is now going through the process of being sold to Apollo Management.

The Vegas heavy hitters MGM-Mirage, Las Vegas Sands and Wynn Resorts (WYNN) are worth taking a look at. A very high P/E plagues LVS as its growth through expansion led the stock to triple since mid 2005. The stock has since come back from it's high of $109 to a more reasonable $83/share. Still however, the stock seems pricey as earnings estimates for this year put its P/E at over 50. Forward P/E is more reasonable in the 20s and for a company with the expansion plan that it has unfolding in Singapore it just might be worth the gamble.

MGM sports more modest ratios but has also seen a double in market cap over the last year. It will also look for future expansion to increase it's stable of 23 casinos. Wynn is going full force into Macau with it's Wynn flagship resort and its stock has not fallen as hard as the others from their year highs.

Each of these fine casino operators are making money hand over fist and the competition to expand into the rest of the world will see cash flows tighten and margins contract. However the road to major profitability and market cap expansion lies in opening and operating more resorts in exotic and touristic locales. With LVS, MGM and WYNN all sporting market caps under $30Billion the possibility of growth accelerating through these expansions will only be beneficial to the stocks. If LVS is the hare, and WYNN is the tortoise it just seems to me that the steadiest ship in this race is the lion. And MGM can certainly roar!

Disclosure: Author holds no positions in any of the above mentioned companies

37 comments:

Jason Wong said...

i'm surprised you didn't mention MPEL! :)

Chris Krasowski said...

I didn't mention Melco PBL because the article's main focus was Vegas-based Casinos and their expansion plans into Macau. Melco is strictly in Macau for the time being and is still losing money. It's a speculative growth play that has a lot of room to run if it executes. However to mention or recommend it I'd have to seriously look at their plans to see what kind of timeframes the company has for breaking even and becoming profitable.

MrX said...

I don't see anything wrong with online gambling as long as their are safeguards in place to protect problem gamblers. When you play online, you can play at your own pace, with no noise, no smoking, and lower stakes.

JJ said...

I would like to go to Las Vegas and play in a high roller casino but it’s an expensive thing to do, even more so when you live in the UK. I have to resort to playing a casino game online instead which lets me win the money but I miss out on the atmosphere, but still save £600 on the 14 hour flight. So until I win big all I’ll do is play online casino dreaming of Las Vegas.

freddyb45 said...

I've visited Vegas a couple of times to play high-stake casino games, but the flights are awfully expensive and I can't afford to do it as much as I'd like. I'm just waiting for a casino to open up nearby my home! Until then, I guess I'll just have to play at an online casino

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