Casino Stocks Could Be a Long Term Jackpot 22 comments
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The "pick of the week" for long term investors: Casino stocks.
We used to think that casinos were recession-proof. But this time, casinos have seen a major slowdown in the industry.
What happened?
In previous years, most big casino companies made major investments using high leverage to build pharaonic projects. Unfortunately, a major slowdown in business along with major debt payments have pressured these companies.
Casino stocks used to be cash cows through three sources of revenues :
- Conference / Seminar / Sports Event: Corporations used to motivate their staff with seminars in Vegas. Major tech events or business events were held in the conference centers of big Vegas hotels. Big sporting events are also often held at casinos. These events generate revenues through use of the casino. The corporate people usually come to Vegas for free (as their company covers the cost of the trip) so they can then overspend in the casino.
In this crisis, public relations played a part as events in Vegas were not well received by Main Street. So we have seen a major drop in corporate events. Also, with the process of controlling costs underway for most corporations, the number of conferences have slowed. This has directly impacted casino returns.
- California : A big chunk of Vegas revenue traditionally comes from citizens of California. But California has been strongly hit by the crisis. Californians have had to cut their spending and Las Vegas is no longer a priority. In previous recessions, California has stepped up but this time it was at the center of the storm.
- Tourism in general : No more credit means less consumption, so less spending by tourists, which lead to less revenues for casinos.
What are the risks now ?
Here are the major risks that the investor has to keep in mind:
- Length of the crisis: This crisis is different than all the preceding ones casinos have faced. We can probably bet on the fact that as soon as growth comes back (even slow growth) casinos will see a pick up in their business.
- Liquidity: Casinos used to be cash cows, but a big slowdown in their business along with huge investment commitment risk has created a cash crunch. Management tried to respond to the crunch with major cost controls and suspension or limitation of their investments. They are also restructuring their debt to reduce short term payments. Casinos are betting on a quick return of growth to allow them to cover long term debt payment.
- Debt exposure: Most casinos are highly leveraged right now. They are facing major payments that increase bankruptcy fears.
- Dilution: In order to clean up their balance sheets, casinos have issued tons of shares. This has created a major dilution for current shareholders. Now, will we face future dilution to improve balance sheets in order to cover future investment commitments?
What are the advantages?
To see the long term potential of casino stocks we need to ignore the short term effects of the recession and focus on what makes these businesses different than others:
- Cash cows: Casinos usually generate major positive cash flow. So generally their debt exposure isn't an issue because they can easily face coupon payments during normal economic times.
- Strong long term margins: Usually casinos enjoy solid margins during normal economic conditions. Growth margins are very impressive because remember: Casinos always win at the end. Don't forget that over the long term, debt pressure will decline and margins will improve from that.
- Expansion in Asia: Many casinos are starting to reap returns on their Macau investments. With the development of Macau, we can expect very strong growth outside of Las Vegas that should be very solid. We can compare Macau to the early stages of Vegas when The Strip first began to grow.
- Human Nature: Let's be honest, most humans are naturally gamblers. Who doesn't want to bet on the outcome of a sports event? Or play poker or roulette or craps? Most people are always attracted to gambling. (The level of addiction is, of course, different in each person, but still demand is clearly there)
- Long term growth: Long term growth of the industry is clear. People will always go back to their old vices, like gambling.
- Cost Control: Thanks to the crisis, casinos are finally taking into account cost controls. We can now expect that these cost controls will have a very positive long term impact in the P&L. In the past, there was a lot of overspending and no real cost control. Now with the recession, managements are finally handling their expenses. This will have a very positive effect over the long term.
- Gambling Laws: This business is directly exposed to government decisions. Laws could have a good or bad effect on the casino business in the long term.
Potential good picks?
- Wynn Resort (WYNN) : This is clearly the best company in the industry in terms of balance sheet and management. Wynn has managed its cash. Its market is the high income gambler and it has a great brand name with this type of customer. Wynn has a strong presence in Las Vegas and in Macau. The dilution for shareholders has been very low if you compare it to other big casino players. It is clearly the best long term pick.
- Las Vegas Sands (LVS): Las Vegas Sands has a major advantage over the long term in comparison to its competitors : Its casino in Singapore is the only casino allowed there. This casino will probably provide huge revenues when the economy picks up. Now, we shouldn't forget the high dilution the stock has already had. But for new shareholders, this dilution shouldn't have a major effect as we don't expect further stock dilution. What remains to be seen is how management will handle the debt exposure because LVS committed itself to huge investments before the crisis. We also need to see if LVS will be able to finish all of its projects after the recession. This should provide very positive long-term rewards.
- MGM Mirage (MGM): MGM made huge investments right before the crisis hit (its Citycenter project, for example). This brought major pressure to MGM's balance sheet and bankruptcy fears have been very high for this company. Now it seems that it has been able to restructure its debt and find financing to cover future payments and finalize its projects. If the economy picks up and Las Vegas returns to the growth people expect, MGM Mirage is strongly exposed and should be well rewarded. The stock has already experienced dilution, and more could be in store to provide for future debt payment. But if the company makes it through the crisis without going bankrupt, long term growth is very attractive.
- Melco Crown Entertainment (MPEL) : This casino stock is less well known than the previous three but the company is involved in some very interesting long term projects that could offer strong rewards for its shareholders. Its balance sheet isn't great but it isn't also in worse shape then MGM and LVS. Crown has high exposure in Australia and in Asia so it will be directly impacted by the long term growth of Asia's gambling market. It could be a very interesting underdog that could provide a surprising upside for its investors.
So what do we do ?
I think casino stocks strongly correlate to the economy. There are many positive elements for long term investors.
Right now, I think that the current rally will end and we'll have another leg down (or two) before moving to a new bull market. Casino stocks will probably dip again before rallying too. Timing in this investment is important.
I would invest in casino stocks as soon as I see any serious recovery in the economy. I will monitor the credit markets and if I see a real pick up in this area of the economy. I will then pick casino stocks to hold for a long time. I don't need to be worried about dilution because when the economy grows again, hotels will generate plenty of cash to help the development of their business. The upside will then be huge when you consider long term development potential for Vegas, Macau and Singapore.
When the economy really starts to grow again, these stocks will outperform the overall market (in the next bull market).
Disclosure : No positions
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This article has 22 comments:
Many investors, perhaps Cramer included, are eventually going to wake up and realise that LVS is actually an Asian gaming company with two of the best properties in Asia - the Venetian in Macao and Marina Sands in Singapore. Marina Sands could wind up becoming the most profitable casino in the world, generating US$1.2bn or so in annual EBITDA. Moreover, unlike Macao and Las Vegas, Singapore is likely to stay a duopoly for the next 30 years given Government restrictions on licenses. And with much lower gaming taxes, Marina Sands (which is due to open by YE or early next year), will be more profitable than the Venetian in Macao and far more profitable than the Venetian in Las Vegas.
The Venetian in Macao is nice, but compared to clean, safe, unpolluted Singapore, Macao is a pretty unattractive place. Singapore will capture more than its fair share of high roller traffic from China, in addition to the South-East Asian market and the growing Indian tourist flow through Singapore.
LVS is not going to go bust with no short term debt maturing until 2011. Once Bethlehem and Marina Sands are fully operational within the next 12 months, don't be surprised to find LVS back in favour and trading at a premium to Wynn.
Sheldon Adelson has said LVS will be a US$100 stock again one day. Eventually it may be, but in the next two years US$30-40 is very plausible. Just restoring LVS to its average historical ratio to Wynn would take LVS to $30 per share.
"Right now, I think that the current rally will end and we'll have another leg down (or two) before moving to a new bull market. Casino stocks will probably dip again before rallying too. Timing in this investment is important."
I would suggest that you take a position now and be prepared to liquidate them (set a stop loss) and measue the market to see if the current rally can continue without a serious or significant pullback which is entirely possible. If that is true you are getting quite a bargain at the current prices.
Almost all of the sell-side Analysts covering LVS failed to call a buy at the bottom. Jeffries showed some courage, then JPM, but equity research analysts are right now a timid bunch, and effectively waiting for prices to rise before upping their forecasts. And then it will be via supposedly tweaking the terminal growth in their DCFs blah, blah, to justify the move. As Warren Buffett says: You pay a high price in the stockmarket for a cheery consensus.
I would not wait for the much anticipated pull-back before buying LVS. The crowd could be wrong, as it usually is.
All in All i still believe that Casino stock will outperform the next bull market.
On May 10 05:45 PM lowtechie1 wrote:
> Don't hold your breath.....casinos did what banks did recently, all
> went up in market mania. Most major banks are statisically insolvent,
> and all the major casino owners on the Strip are saying recovery
> is a long way off. They also realize the world must recover first.......the
> USA won't lead in that recoevery and won't be the catalyst for growth.
Now i also think that (as a long term investor) today price are still very attractive even if there is a pullback.
On May 10 11:48 PM InvestBaboo wrote:
> Agree with everything you say except the following:
>
> "Right now, I think that the current rally will end and we'll have
> another leg down (or two) before moving to a new bull market. Casino
> stocks will probably dip again before rallying too. Timing in this
> investment is important."
>
> I would suggest that you take a position now and be prepared to liquidate
> them (set a stop loss) and measue the market to see if the current
> rally can continue without a serious or significant pullback which
> is entirely possible. If that is true you are getting quite a bargain
> at the current prices.
Boris, there is a lot of cash on the sideline you are right but there is also a lot of fear still here (VIX at 32 is pretty high still) so it is still in favor of a pullback.
Now once again even at this price LVS and others are good long term pick and i agree with you, people miss the potential of Macau or Singapore (for LVS)
On May 11 04:07 AM Boris Yeltsin wrote:
> I agree with InvestBaboo (btw, is that your real name?). As you
> say in another post, there is so much cash on the sidelines, equities
> are inevitably going to go up. But rather than actually look at
> the money market mutual fund data people prefer to talk earnings
> expectations and Nouriel Roubini style about the macroeconomy (trillions
> "ov kreddit lowsses"). Fortunately, the stockmarket is not really
> that complicated.
>
> Almost all of the sell-side Analysts covering LVS failed to call
> a buy at the bottom. Jeffries showed some courage, then JPM, but
> equity research analysts are right now a timid bunch, and effectively
> waiting for prices to rise before upping their forecasts. And then
> it will be via supposedly tweaking the terminal growth in their DCFs
> blah, blah, to justify the move. As Warren Buffett says: You pay
> a high price in the stockmarket for a cheery consensus.
>
> I would not wait for the much anticipated pull-back before buying
> LVS. The crowd could be wrong, as it usually is.
Over the long term LVS has probably the biggest potential (with their expansion and more important their Singapore casino that is the biggest potential one i think) but on the short term they face more pressure then Wynn and the management of LVS is less serious then Wynn.
I would say that Wynn is the most secure casino stock (with the less upside potential but still very strong upside potential) and LVS is the biggest potential stock with more risk.
Now over the long term LVS sounds more interesting but also more risky than Wynn.
On May 11 06:35 AM Boris Yeltsin wrote:
> Gregory - one thing I don't agree with you on is your assertion that
> Wynn 'is clearly the best long-term pick'. I agree that Wynn has
> the best reputation and has effective management, however it is also
> priced accordingly. You may sleep more soundly knowing that everyone
> feels good about Wynn, and it will do fine versus the overall market,
> but I'm pretty sure that LVS will prove to be a much more profitable
> investment, even on a 5-10 year horizon, if purchased today.
The real gem is IGT. Just like the store owners in the gold rush.
And Shaggieman, legalize pot would be a great tax return but also a huge public relation mess on the health side ;)
How much tax would pot legalization provide to US ? Do we have the figures out of Netherland where it is legalize ? ;)
On May 11 05:50 PM Econ 101 wrote:
> What about the effectg of legalizing internet and handheld gambling??
> Barney Frank is moving to legalize it so it can be taxed. This will
> help the big casinos at the expense of the Indian and smaller casinos.
> It will also bring revenues that currently go overseas back into
> the US.
>
> The real gem is IGT. Just like the store owners in the gold rush.
To the person who mentioned IGT above they are spot on. They have the expertise to move into online licensing for their slot customers in LV and can readily coordinate the back-end integration with brick and mortar operations. It is for this reason in part they acquired WagerWorks.
I think that being a little bit patient and be reassure about a real economic bottom to enter in casino stock is the right move like i said even if 10+ is still a great long term price for MGM probably.
Also, the market is taking some profit and the legdown i though about is happening. Now i like to see that the VIX is still below 33-35 which is quiet good to expect in the next month a real bull market
We're going the way of Europe in terms of our economy, and the casinos in Europe are pithy, small, with a small amount of betting.
Also Casino in Europe are doing well :)
Now i expected dilution risk still (because the economy is still in bad shape) and we are right on track with the big MGM dilution.
But if investor enter when the economy visibility is a little better, they will have no worry about the dilution
On May 13 08:32 PM Michael_Cohen wrote:
> Casinos are going bust. The casino market is highly, highly economically
> sensitive; more so than pretty much anything else. They're highly
> dependent on upper-middle class and wealthy people blowing a fair
> amount of money, and that group is getting decimated and will continue
> to be thanks the political powers that be.
>
> We're going the way of Europe in terms of our economy, and the casinos
> in Europe are pithy, small, with a small amount of betting.
buying here could still be a good bet but think about the DOWNSIDE if they even retrace 50% from lows... which was what a month ago?
I dont see people running to Vegas to gamble when they are worried about Jobs and their mortgages,,, but thats just me
Also Casino in Europe are doing well :)
Now i expected dilution risk still (because the economy is still in bad shape) and we are right on track with the big MGM dilution.
But if investor enter when the economy visibility is a little better, they will have no worry about the dilution"
The thing is Asia depends HUGELY on consumer spending/exports... a lot of that comes from the USA. I don't think China and certainly not Singaporeans are even CLOSE to being out of the woods. The Rallies in China and Hong Kong, as well as here and Europe are a joke...I am along for the ride until the rally heads south, but unless Jobs are created and people ( especially Americans) are spending again...you can forget about Casino stocks/Chinese exporters and that whole trade..sure they can trade alot higher with the general market since their short floats are HUGE it doesn't take much to squeeze them..but you have to remember WHY their short floats are HUGE.
I see the dollar weak and Oil a good bet for LONG term ..the next year or so not much demand but we all know oil will be back at 100 in a couple years...why not go with the sure things... the WHENS not IF'S