One of our greatest calls was being bullish of Las Vegas Sands (LVS) during the "Great Recession". We directed some into the shares in the low single digits and rang the register in the $35-45/share range. We were still bullish on the outlook for Asian gaming names, particularly those with exposure to Macau, and thus continued to keep track of the names and periodically update readers on our outlook.
With the latest numbers from the gambling Mecca it is quite obvious that the industry is making inroads with China's growing middle class while also continuing to draw in the high net worth clients (although this segment did take a hit with recent crackdowns). With growth set to be harder to come by in 2014 before big growth in 2015 again, we see an opportunity to be bullish the Macau names throughout 2014 while adding to positions on any weakness over the course of the year.
Chart of the Day:
Source: Yahoo Finance
We have economic news today and it is as follows:
- Initial Claims (8:30 a.m. EST): Est: 333k Actual: 339k
- Continuing Claims (8:30 a.m. EST): Est: 2875k Actual: 2833k
- Construction Spending (10:00 a.m. EST): Est: 0.8% Actual: 1.0%
- ISM Index (10:00 a.m. EST): Est: 56.9 Actual: 57.0
Asian markets finished mostly mixed today:
- All Ordinaries -- up 0.29%
- Shanghai Composite -- down 0.31%
- Nikkei 225 -- up 0.69%
- NZSE 50 -- UNCH
- Seoul Composite -- down 2.19%
In Europe, markets are trading lower this morning:
- CAC 40 -- down 1.15%
- DAX -- down 1.17%
- FTSE 100 -- down 0.30%
- OSE -- down 0.65%
Macau Continues Rapid Growth
When it comes to the casino industry one has to have exposure to Macau, the world's largest gambling destination and the only legal area in China to bet. The island sports gaming revenues which are now seven times larger than that of the US's Las Vegas and the rate of growth each year is astounding.
The new today is that Macau did $45 billion in business last year with revenues rising 18.5% in December on a year-over-year basis, a figure which came in above the high end of analysts' estimates. Although growth is expected to slow in 2014, many see growth picking up in 2015 as new casinos open up.
The biggest beneficiaries of this tremendous growth remain Las Vegas Sands and Wynn Resorts (WYNN) without a doubt. Investors should also see further gains for these two as new casinos are opened moving forward, with Wynn building another mega casino that will have dancing fountains. Both stocks are up on the Macau news today and we continue to believe that Las Vegas Sands is a name that investors need to own. It is expensive, but the growth is still there.
Not All Casino Stocks Created Equally
Our main focus over the past two years in the sector has been Las Vegas Sands due to its international focus and exposure to Macau. Another name with exposure to Macau is MGM Resorts (MGM), however their Macau casino was a joint venture with the Ho family and that entity has now been listed, leaving MGM as a 50% owner of the MGM Macau. This is the best of the rest, but after this name the quality quickly falls off.
Shares of Penn National Gaming have been strong performers since the REIT proposal and subsequent split, but we think that the company now reverts back to an underperforming regional casino operator.
Source: Yahoo Finance
Two names we would stay away from in the casino sector are Penn National Gaming (PENN) and Caesars Entertainment (CZR). Sure both stocks seem to have room to run with Penn National recently creating a REIT and Caesars making inroads into the online gaming business but both strategies pose serious risks moving forward. In the short-term investors could enjoy moves in both stocks, but looking out a few years we could see issues resulting from the split of the operating company and the real estate assets with Penn National and competitors arising to take on Caesars in the online gaming sphere. At the end of the day Penn National did not create a better regional gaming company by splitting the company and Caesars entered into a very competitive market in the online gaming business...a fledgling industry which may hurt Atlantic City revenues moving forward.
With the news out of Macau continuing to be so strong, and other areas of Asia showing strength too, we think that investors need to forget about the regional casino operators and instead focus upon the names with exposure to Macau and other Asian destinations. This is why we like Las Vegas Sands, Wynn Resorts and MGM Resorts at this time.