A Las Vegas Recovery: Time To Bet On MGM And Caesars?

Includes: CZR, LVS, MGM, WYNN
by: Tim Plaehn

The Great Recession hit Las Vegas hard, and not just the housing and construction industries. In 2008 and 2009, Las Vegas gaming revenues declined by close to 10% each year. In 2010, gaming proceeds managed to increase by a few percent, but remained well below pre-recession levels. For 2011, the gaming companies fared a little better and now it appears Las Vegas is on a path of sustained gaming growth.

Through the recession, the two major gaming companies, Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) were able to generate tremendous profit growth from their Macau and Singapore operations. The Asian profits more than made up for losses from the two companies' Las Vegas casinos. Las Vegas Sands shareholders did especially well, with the share price increasing by more than 2,000% over the last three years.

The Las Vegas Review Journal, quoting a report from Moody's Investor Services, noted that the number of visitors to the city in 2011 almost matched the record number set in 2007. Gaming revenue on the strip increased by 5% in 2011 and analysts are forecasting a similar growth number in 2012. To take advantage of the recovery in Las Vegas, investors may want to take a look at the gaming companies with the largest number of LV Strip properties: MGM Resorts International (NYSE:MGM) and Caesars Entertainment (NASDAQ:CZR).

MGM owns the largest number of rooms on the Las Vegas Strip and carries the debt to match -- $13.6 billion. annual interest on the debt is approximately $1.1 billion. Growing revenues allows the company to accomplish two things which should result in higher share prices. First, more revenue obviously leads to higher EBITDA, the company's profit benchmark. For 2011, EBITDA was $1.55 billion, up from $930 million in 2010. A 4% or 5% growth in revenue for the year could double EBITDA remaining after I(interest) is subtracted. Second, better financial results will lead better perceived credit risk and lower interest rates. Already in 2012, the company issued debt at 8.75% in January and was able to borrow at 7.5% in March. A 1% overall reduction in borrowing rates is good for about $130 million in interest savings.

The recently IPO'd Caesars Entertainment is a scary but interesting prospective bet on a Las Vegas gaming recovery. Formerly, the company went by Harrah's Entertainment, which was taken private in January 2008 with an $18 billion leveraged buyout. Bad timing. Investors put $6 billion of cash into the buyout and at the current share price, the company has a market cap of $1.6 billion. Looking at the financials, Caesars lists on the balance sheet long-term debt of $19.8 billion and other long term liabilities of $6.1 billion. In 2011, the company paid $2.12 billion of interest and reported adjusted EBITDA of $1.94 billion. Las Vegas casinos accounted for about one-third of Ceasar's 2011 revenues. For the year, those casinos reported a revenue gain of 6.3%, operation income gain of 41.6% and EBITDA increase of 15% compared to the 2010 results. For the entire portfolio of 53 casinos, EBITDA increased 3.9% in 2011.

Of these two gaming stocks, MGM Resorts is the safer bet and 2012 should allow the company to solidify its balance sheet and propel the stock higher. Ceasars offers a highly leveraged bet on a rebound in Las Vegas as a popular vacation destination. Positive numbers on the overall Las Vegas results will also help push share prices higher as the market anticipates better results when reporting time rolls around.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.