Article by Frank M. Bifulco, CFA - Alcott Capital Management
“Go West Young Man, Go West” was the advice from Horace Greeley. No doubt the folks who built Las Vegas took that to heart as they made the gambling mecca a multi-billion dollar colossus the last 60 years. But Greeley may not have told his protégé to go far enough west – for the real action is in Macau, the ex-Portuguese colony off the coast of China that is fast-becoming a turbo-charged version of Las Vegas.
The Chinese government strictly controls gambling licenses so the problems that hit Las Vegas with over-supply and competition from Atlantic City and Indian casinos are not an issue. While the mature markets of Las Vegas and Atlantic City struggle for revenue growth (AC is actually 40% below its 2007 peak), Macau continues to grow revenues at an astronomical rate, fueled by newfound Chinese and Asian wealth. Recent year-over-year revenue growth for Macau casinos are in excess of 50%. Las Vegas and Macau were at parity in 2006; Macau may finish 2011 with 5x as much revenue as Las Vegas. Many of the Asian high-rollers frequenting Macau used to go to Las Vegas or Atlantic City because there were no closer options. Now there are.
Wynn Resorts Ltd. (NASDAQ:WYNN) is run by the legendary Steve Wynn (Golden Nugget, Mirage) and trades for about $140 or 24x 2012 EPS. Las Vegas Sands (NYSE:LVS), run by Sheldon Adelson, trades about $45 or 19x 2012 EPS. Both companies have gaming venues around the globe, including Las Vegas, so they are not pure-plays on Macau. But Macau is the growth engine that separates them from U.S. domestic plays. MGM Resorts International (NYSE:MGM) and Melco Crown Entertainment (NASDAQ:MPEL) are more aggressive plays on Macau and Asia, both have less-seasoned management and higher operational and financial risks. Based on EV/EBITDA (which adjusts for differences in capitalization structure), Melco Crown is the cheapest in the group at about 8X EV/EBITDA on 2012 estimates, but also carries the highest risk because of financial and operating leverage to the higher-growth Asian markets. MGM Resorts trades at just under 10X EV/EBITA, and Las Vegas Sands and Wynn are at 13X and 11X, respectively.
There is only one pure gaming ETF – the Market Vectors Gaming ETF (AMEX:BJK) – and it is fairly small at just under $150 million in assets. LVS, WYNN, and MGM are all in the Top 10 holdings list which numbers over 50 stocks in total. Separately-listed entities for the Asian holdings of the U.S. casinos are also in BJK so you get a bit more ‘juice’ from the inclusion of Sands China and Wynn Macau. PowerShares Dynamic Leisure & Entertainment (AMEX:PEJ) ETF has casino stocks but is mostly a play on consumer discretionary spending. WYNN was the only casino stock in the Top 10 holdings for PEJ.
Do you really feel lucky? Then you might want to take a look at International Game Technology (NYSE:IGT), the premier supplier of slot machines and other gaming equipment. If Las Vegas and Atlantic City recover in the U.S., then a new replacement cycle (including the Indian casinos) should boost domestic revenues while new casinos and expansion in Macau and Asia boosts overseas sales. IGT is a higher-risk, higher-reward play on domestic and global gaming so make sure you do your due diligence to prevent your investment from coming up snake eyes.
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