For investors looking to benefit from a recovery, gaming stocks offer tremendous risk-adjusted returns. Las Vegas Sands (LVS) has soared by 21.5% for the year to date, beating the Dow Jones by 1,620 basis points. The firm has a beta of 3.6, roughly in-line with that of MGM Resorts (MGM). Perhaps ironically, these two firms are 50% or more volatile than Wynn Resorts (WYNN) and yet are rated higher at a "buy".
Las Vegas Sands trades at a respective 35.7x and 20x past and forward earnings while Wynn trades at a respective 28.2x and 20.5x past and forward earnings. MGM is forecasted to be bleeding losses for at least up until 2013. Las Vegas Sands, on the other hand, has demonstrated strong cash flow activity.
At the recent fourth quarter earnings call, Las Vegas Sands' Billionaire Chairman & CEO, Sheldon Adelson, noted a stellar year:
For our company, 2011 was a landmark year in which we broke company records and at the same time, we believe most industry records for revenue, EBITDA and earnings per share. I want to walk you through a more detailed look at the previous quarter which includes record results in Macau and Singapore, an incredible growth in our mass gaming, hotel and retail businesses. But first, let me provide some additional perspective on 2011 and share my thoughts on where the company is heading for 2012.
Thanks to our financial strength and significant liquidity, we are happy to announce that the LVS Board of Directors has approved an annual dividend of $1 per share, which will be paid at $0.25 per quarter; that is $0.25 a quarter.
The gambling firm has been gaining market share in Macau and the opening progress of Galaxy Macau represents a major catalyst. Greater clarity about Cotai Central will further help mitigate volatiles. At the same time, margins are trending upward, particularly at Macau. With the introduction of the dividend yield, management has taken a major step forward in attracting more risk-averse investors. Las Vegas Sands has solid opportunities to expand scale in Japan.
Consensus estimates for Las Vegas Sands' EPS forecast that it will grow by 27.2% to $2.57 in 2012 and then by 17.5% and 14.6% in the following two years. Modeling a CAGR of 19.7% for EPS over the next three years and then discounting backwards by a WACC of 9%, implies 15.4% downside. Given the strong fundamentals of the firm, however, I foresee continued outperformance for Las Vegas Sands.
MGM Resorts has even greater risk. The firm is more exposed to Las Vegas than what the market may acknowledge, and returns in Macau may start to decelerate. On the other hand, Las Vegas Sands has had solid revenues on the Strip and a recovery will catalyze improved pricing. At the same time, while the Macau business is speculated to begin distributing dividends, operations are debt-loaded and would hold back benefits derived from a recovery. Less than 10% of net debt may be shaved off by 2013. During the same period, ROIC is expected to hit a high in 2011 at 25% and then decline possibly to as low as 3.5%.
Consensus estimates for MGM's EPS forecast that it will be a loss of $0.52 in 2011, a loss of $0.39 in 2012, and then a loss of $0.07 in 2013.