Money's 2012 "World's Most Admired Companies" report placed many familiar Las Vegas casino operators at the top of the list for the hotels, casinos & resorts category. Wynn Resorts (WYNN) ranked second, Las Vegas Sands (LVS) ranked sixth, MGM Resorts International (MGM) ranked seventh, and Caesars Entertainment (CZR) ranked ninth. But what does this really say about each company? While these companies ranked high on the survey, investors do need to watch out for debt maturities, legal battles, and disappointing cash flows which could negatively impact stock performance. Below, I will make recommendations to investors based on my findings.
Most Admired Hotels, Resorts, and Casino Companies
Starwood Hotels & Resorts
Las Vegas Sands
MGM Resorts International
In particular, the methodology Money used to create these rankings involved surveyed industry professionals who voted for the competitors which they admired most from their own industries. Hotel, resort, and casino professionals fear and respect these companies as competitors. By saying they admire these companies as competitors they truly think firms on this list are threats which could take market share.
High reputations constitute a competitive advantage for businesses operations: It is psychological power over customers, suppliers, and partners. Unfortunately, these rankings do not justify high valuations nor do they combat the significant risks facing each of these casino stocks. Investors would do best to keep away, and could readily obtain the advantages of industry reputation from Wyndham Worldwide without the casino drama.
Cash Flow Three Card Monte
Certainly, better rankings are a plus for a company, but they are merely the beginning for investors. Investors get compensated through free cash flow, and do not directly benefit from happy employees, reputation, or even happy customers. In short, these rankings are enough to say that a company is good for employees, but not necessarily for its investors. These rankings do not consider how capital intensive casino operators are.
Clearly, the big casino operators are not cash cows. Currently MGM has the lowest of the four with a price-to-free cash flow ratio of 18.85. Moreover, historical free cash flows and operating cash flows for large casinos were found lacking in a prior article. Contrary to public perception, casino operators compete in a tough industry where there is always a bigger, fancier casino's grand opening which threatens to steal your patrons.
Recent announcements demonstrate how these casino operators need to beg for financing capital. MGM Resorts recently raised $1 billion in a bond offering, though this is only the beginning, since it faces $8.5 billion in debt maturities over the next four years. Similarly, Caesars Entertainment intends to sell $500 million in new shares, even after racking up as quarterly loss of $1.76 per share.
The necessity for endless capital expenditure to remain relevant overshadows other valuation metrics like price-to-earnings or price-to-book. This year's earnings or historical cost mean little when other investors start a funding war for new projects. The no-limits dilutions, leveraging, capital expenditures, and looming debt repayments of resorts and casinos hit investors harder than a floor manager breaking a card counter.
Ringside at Wynn v. Okada
The biggest bouts are not fought at Caesar's Palace: They're fought in court. The legal battle royale between Stephen Wynn and Kazuo Okada makes Ultimate Fighting look like a tea party. Wynn alleged that Okada made dozens of improper payments to gaming officials. Okada claims his shares were not properly liquidated. Wynn Resorts liquidated his stake at a 30% discount according to a redemption provision in the company's articles of incorporation which allow discount liquidation for "unsuitable" investors. Okada claims he invested before this provision took effect. The Bloomberg article quoted a counterpunch by Okada's lawyers:
"Wynn Resorts, for all its accomplishments, is not a corporation in any ordinary sense," Okada's lawyers said. "Rather, Wynn Resorts' flamboyant chairman, Mr. Wynn, has run Wynn Resorts as a personal fiefdom, packing the board with friends who do his personal bidding, and paying key executives exorbitant amounts for their unwavering fealty."
If Wynn v. Okada is the main event, then a preliminary match will be fought between of Las Vegas Sands and Asian American Entertainment. Four subsidiaries of Las Vegas sands will have to defend themselves against legal claims for $375 million in Macau. The claim rests on an agreement to bid on a casino license, which allegedly was broke off improperly by Sands.
These legal battles cast doubt on the belief that international casino operations are easy money. Clearly there are risks.
Capital Invested in Vegas Stays in Vegas
Las Vegas clichés and debauchery seem downright wholesome when compared to the horrors casino investors are put through. All in all, investors would do better staying away from casino operators altogether.
As an alternative to casino operations, consider Wyndham Worldwide. This hotel company beats out the casino operators to top Money's "World's Most Admired Companies" report for the hotels, casinos & resorts category. As a hotel stock, Wyndham does require financing and capital expenditures, but not nearly to the same extent as its casino counterparts. This is demonstrated by how it beats out the casino operators based on its cheap 9.93 price-to-free cash flow ratio. With the exception of MGM, Wyndham also trades more cheaply than the casinos based on earnings. To invest in a higher reputation and lower valuations, bet on Wyndham against the house.