03 October, 2007

Casino Stocks Fall Sharply on Macau Revenue Growth, Investors shouldn't be quick to jump ship

The Major Casino players have been on quite a run during the late summer months, seemingly hitting new highs daily. The front runners have been Las Vegas Sands (LVS), Wynn Resorts (WYNN) and MGM-Mirage (MGM) and the almost meteoric rise was substantially due to the expectations of growth in the sector in Far East regions like Macau.

Today's news has given major Casino players quite the haircut. LVS and WYNN, which are two of the biggest players in Macau were most hurt by the news that year over year Revenue growth for gambling in the region would be only 55%. Only 55%? That's it, ballgame over. Not so fast, but as with all things growth, and you better believe it Casinos are now growth oriented businesses, comes the gift and the curse that is expectations. The Morgan Stanley analyst who reported views of a softer than expected growth rate was expecting growth to top 75% year over year in the region. When you're talking about huge growth, and "miss" will lead to deflation and some investor panic.

Sometime though, growth numbers get thrown around in bunches ever so higher and it takes a session of humility to bring those valuations in check. I think we got that today and Macau, even at more realistic growth projections is still the real deal as the biggest gambling spot on the planet. So as LVS and WYNN drop 12% and 10% respectively, its time to appreciate the opportunity that has finally been given to own these companies. The casino operators will be a sustainable and substantial business going forward and as a long term investor owning a Casino has got to be right up there with owning a Stock Exchange, an Alcohol company, Food & Beverage, Diapers, Soap and Taxes (If you could invest in a piece of a good government!).

The last time I had to chance to speak about Casino stocks was almost 2 months ago ("Gambling on Gambling") and of the 5 companies I mentioned I thought MGM, LVS and WYNN were the only ways to consider playing, leaving Trump (TRMP) and Harrah's (HET) by the way side. My recommendation on a valuation and forward basis at that time was MGM simply because it was very well positioned in its growth prospects and had not received an outlandish P/E ratio that would bring about higher downside risks. When I wrote the article I said that LVS had been the Tortoise, WYNN was the Hare and MGM might just end up being the Lion.

Since the article here's how things have fared.
LVS: +52%
WYNN: +48%
MGM: +29%
HET: +3%
TRMP: -6%

Its clear that the Casino stocks have done very well of late, and I'd love to toot the horn but I missed the party too. I wrote about the stocks but didn't own a single one and while MGM has seen LVS and WYNN breeze past it in terms of gains I'm sticking with MGM as my Lion. The 10%+ haircuts to WYNN and LVS make them more attractive going forward but LVS has a P/E of 135 and forward P/E of 30, while MGM sits at P/E ratios of 30 after its 3% drop today. To me LVS has a lot more to sustain in order to continue rising and any hint of a slow down in growth, like today, will be met with much bigger waves by the market.
Then again sometimes you just gotta hit 16.

Disclosure: Author holds no position in any companies mentioned above at the time of writing


Fletch said...

Hello Chris.

This is "off topic" since it relates to Ebay's stock performance and not the casino stocks. I saw one of your good articles re: Ebay at Seeking Alpha, so I followed you here to ask you some questions. I hope you don't mind.

I am a newbie with regard to trading/investing in Ebay. So I have a basic fundamental question.

Listings growth is a significant issue with Ebay. How does Ebay increase listings? When Coke wants to increase market share for Coke Zero - for example - they might engage in focus groups, employ advertising strategic advertising, undercut competition via price, lock up the bulk of the supply of the key ingredient that contributes to the zero carb taste, etc.

When the execs at Ebay come to work and say "we want to increase listings" (or "we want to increase listings growth") - what steps do they do to do this? Seems to be it is mostly buying other businesses and attempting to grow them.

Do you agree or are there other key steps they take?


Seperately, do you agree that Ebay's stock price seems to be relatively unaffected by macroeconomic factors like inflation, interest rates, employment, consumer confidence, etc.?

Looking forward to your insight on this.



JJ said...

I really enjoy gambling in Las Vegas, Atlantic City, and Macau.

Anonymous said...

I simply love Online casino, I play every day and I keep coming back for more.
I am not a problem gambler because I earn enough money to be able to support
myself and continue my online gambling time. I truly enjoy the relaxation time I
get and the ease with which can use and access online casino's. I hate the
stigma that is associated with gambling online as I view it as a release, an
escape and real "me" time. If it were to become a problem then I have no doubt
that I could and would simply cut online casino from my daily vocabulary. As it
stands though, gambling is simply something I enjoy and the internet and online
play are just a good way to access casino's. Playing against the house means I
never have to worry or feel about actually taking money from someone else as it
is only the online casino that would be paying me off for my wins. Talking about
wins, I have had some great wins in my online gambling career – my biggest so
far is $5000 on roulette, on one spin. I am fit, happy, healthy and I love life
and the online casino is just part of my every day existence and escape.

Anonymous said...

Technology is ever increasing in the online world and Online businesses are
springing up every second to get on board the information super highway - "The
World Wide Web". We already have online auctions which have played a major role
in efficiency for everyday consumers to get bargain based products from all
areas of the world, but now we are faced with a new dilemma, Online Gambling and
online casinos. As a concerned member of the human race, I'm not sure that
Online gambling would be a legitimate business that benefits us as a society.
The big questions is, are the positives of online gambling greater than the

Casino, Pokies, Bingo, slots and gambling centers all around the world are
already the cause of many family breakdowns and financial woes. Now we're taking
it to the next level – going online for our gambling. With the rate of young
adults participating in global gaming communities, by the billions, Gaming
companies are encountering a massive profit / money making facility just by
traditional arcade game play – which is absolutely fine. However, now parts of
the world are investing heavily in developments of Online Gambling and Online
Casino software to target global hopefuls in chances of winning their Million
dollars or their Austin Martins. How are we to monitor companies that provide
online gambling facilities? In some countries under developed countries, hungry
scheming predators are lurking about waiting for the next 'big idea' in ripping
consumers and the wonderful world wide web offers to do that. Where else can you
build a money making machine that can directly be linked to an offshore business
account in the British Virgin Islands and be able to people off? Online Casinos
are a major threat to our global socio economics and are a nuisance to the
Online community and the community at large. If I want to gamble I'd spend my
money and go to Las Vegas, instead of typing in my Credit card details and stare
at my laptop hoping to win money. Say no to Online Gambling and Online Casinos.
I sure did.

Anonymous said...

The mathematics of online gambling are always against the individual. There
is no way that a professional gambler could ever say otherwise and yet how come
there are people that make money every day playing and gambling online every
day? Simply, they employ good strategies that work more in their favour than the
average person. The main goal of the professional gambler is to either target
weaknesses in online gambling or online casino's or play the other people off
and win their money. The professional gambler is not bothered by the winning or
the losing they simply focus on how they can win more and the best methods to
employ in order to get to their goal. Bet big to recoup loses is a good method,
a simple and yet effective method which can be employed on the roulette table by
betting on red or black in roulette. The method is simple, if you lose then
double up the bet and repeat until you win, then go back to the original amount
and then repeat until you are winning consistently. Another method on roulette
is taking a section of the wheel, like betting on a row of numbers next to each
other. That way if the wheel lands in a region consistently then there is
greater chance of it being on one of your numbers instead of on random text.

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