When you first walk into a casino, you are bombarded with the sights and sounds of multiple stimuli. The sounds of many slot machines can put you in a trance, enticing you to try your luck.
From an investment standpoint, the casino stocks have a lot of volatility, which is good for short-term traders. I want to take a look at the major players to see how investors can benefit.
The casino stocks lost most of their value during the 2008 recession. Although they’ve recovered significantly from the 2009 lows, they still have yet to come close to their 2007 highs. I think that this positions them well for a longer term recovery to those previous highs.
The gaming industry just received a positive change in legislation. The United States Department of Justice has announced this week that it is changing the rules for online gaming. Previously, sports wagering, card games and casino games were ruled illegal over the Internet under the Wire Act of 1961. The new rule now limits the Wire Act to just sports related gambling. This opens up a whole new source of income for the various casino companies as they can explore online gaming as an additional revenue source.
WMS Industries (WMS): The manufacturer of mechanical and video casino games sports a low forward PE ratio of 11.55 and a PEG of 0.90. It currently trades at less than two times book value per share.
Although the stock was cut in half in 2011, it appears to be bottoming. It is expected to grow earnings annually at 14.4% for the next five years. Although it has a downward earnings revision for next year, it is expected to grow earnings at 15.7% in 2012.
Scientific Games Corporation (SGMS): The provider of gaming solutions for lottery and gaming companies has a forward PE ratio of 20 and a high PEG of 6.88. This stock also trades at less than 2 times book value per share.
It is expected to grow earnings next year at 444% and is expected to grow earnings annually at 15.09% for the next five years.
Boyd Gaming (BYD): The operator of 15 casino facilities has about 21,400 slot machines, 425 table games and 7,550 hotel rooms. Its PE ratio is high at 26.96 and its PEG is a little inflated at 4.69 due to negative earnings. However the stock is currently trading at $7.50 which is under its book value per share of $13.91.
The past five years were dicey for Boyd as earnings grew annually at a negative (50.37%). However, expectations for the next five years are high as Boyd is expected to grow earnings annually at a positive 48.97%.
Wynn Resorts (WYNN): The operator of Wynn Casino Resorts in Las Vegas and Wynn Macau Casino Resort and Encore at Wynn Resort in China. Wynn is fairly valued with a forward PE ratio of 18.25 and a PEG of 0.52. The stock trades at just over five times book value per share.
It has two upward earnings revisions and one downward earnings revision for next year. Its earnings expectations for the next five years are high as it is expected to grow annually at 39.85%. Wynn also pays a 1.8% dividend.
Melco Crown Entertainment (MPEL): The Hong Kong based operator of Macau resorts - City of Dreams, Altira Macau, Mocha Clubs and Taipa Square Casino - is a $5.1 billion mid-cap company. Its forward PE ratio is 16.2, but it looks undervalued with a PEG of only 0.36. The stock trades at less than two times book value per share.
Melco has lofty expectations for the future. It has four upward earnings revisions for next year and only one downward earnings revision. It is expected to grow earnings annually at 56.3% for the next five years. If it meets or exceeds these high expectations, the stock could have a nice upward run. However, if it falls short, the stock could fall further.
Las Vegas Sands (LVS): This is a $31.3 billion large-cap operator of multiple casino resorts in the United States, Singapore and Macau. It has a forward PE ratio of 16.74 and a PEG of 0.41. The stock trades at just under four times book value per share.
LVS also has high expectations for the future (similar to Melco Crown). It has four upward earnings revisions and one downward earnings revision for next year. It’s expected to grow earnings annually at 53.13% for the next five years. This stock has a history of volatile trading. It’s common for LVS to experience upward and downward moves of 20%-30% within just a few weeks.
MGM Resorts International (MGM): This is a $5.08 billion mid-cap company that operates casino resorts in the United States and Macau. It currently looks undervalued with a super low trailing PE ratio of 1.79 and a negative PEG of (1.54). The stock is currently trading at about $2 under its book value per share.
MGM has three upward earnings revisions for next year. It’s expected to grow earnings annually at a modest 13% for the next five years.
International Game Technology (IGT): This is a $5.12 billion mid-cap company that manufactures slot machines and video lottery machines and offers various casino management support products. The company looks fairly valued with a forward PE ratio of 13.87 and a PEG of 1.25. The stock trades at 3.55 times book value per share.
IGT has two upward earnings revisions and one downward earnings revision for next year. It is expected to grow earnings annually at 12.95% for the next five years. IGT also pays a dividend, yielding 1.4%.
Due to their volatility, I don’t like these stocks as long-term investments. The casino stocks have erratic earnings, which can create erratic stock prices. Fast moves of 20%-30% within a month are common with these stocks. However, this volatility can create opportunities for short-term traders. I think you can trade them between extreme oversold and overbought levels as indicated by the stochastic oscillator. LVS is a classic example of a stock that trades with a lot of volatility. Take a look at the one-year chart below and you can see how drastic the volatile pattern is. Buy the dips and sell the rips.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.