Las Vegas Sands vs. Wynn Resorts: The Great Casino Debate

This week Newsweek published and article that cited some interesting data points about the gaming industry. The article noted that, according to the Las Vegas Convention and Visitors Authority, Las Vegas has seen gambling revenues fall only once since 1970. This was in the aftermath of the Sept. 11 terror attacks when revenues dropped by 1% from 2001 to 2002. However, it seems like the Strip might be headed for another down year because so far, revenues have fallen 4% due in part to a 10.4% slump in conventions and average daily room rates that are off by 3.8% during the first two months of the year. But the flipside to the story for companies in the gaming sector is casino health abroad, which is in diametric opposition to how the United States has fared.

The Asian hotspot of Macau reported gaming revenue in the first quarter of 2008 that is now larger than its western counterpart, rising by 62% compared to the same period last year to reach $3.8 billion. And that is why casino stocks can be particularly worthwhile in a time of economic downturn here in the states, especially when many companies in the sector are trading well off their 52-week highs. A couple of large cap names that are often discussed include Las Vegas Sands Corp. (LVS) and Wynn Resorts Ltd. (WYNN).

For the year ended 2007, Wynn saw revenue in Macau of $1.39 billion and a market share of 17% while Las Vegas Sands, thanks to its Sands Macao and the opening of its Venetian Macao, saw revenue of $1.7 billion and a market share of just under 20%. When it comes to valuation, Las Vegas Sands sports a forward P/E of 38.9 while Wynn is slightly lower than that at 34.3. While the numbers are pretty similar, what’s surprising is the difference in growth rates that would suggest a higher and richer valuation for shares of Las Vegas Sands.

Admittedly, future earnings projections have come down significantly, but the consensus analyst estimate still calls for earnings to rise from $1.27 to $1.89 (three months ago it was $1.90, $2.69 respectively) over the next year for growth of 48.8% on top of revenue that is supposed to increase at an equally strong pace of 34% $5.04 to $6.76 billion. On the other hand, Wynn earnings are expected to grow at a lackluster rate of 4.4% from $2.97 to $3.10 on revenue growth of 23.7%.

While one thing that may weigh on the story and scare away investors is Las Vegas Sands’ $7.5 billion debt load, the stock and its consequent valuation is being short changed when considering its prospect for growth. While Wynn is planning Macau expansion, Las Vegas Sands is being even more aggressive in its plans not only for more development in Macao and the Cotai Strip, but real estate in Las Vegas, a gaming complex in Pennsylvania and has made a big $4.0 billion bet on a resort and casino in Singapore to open in 2009.

To be fair, the company surely whiffed in regard to its recent results, reporting an unexpected $11.2 million first quarter loss because of weakness on the domestic front and in Macau where it faced increasing competition and lost market share in the VIP business. But estimates are already pricing in any short term weakness at home or Macau missteps and that’s why the analysts came out in droves to support the stock after the latest quarterly report, especially with the stock trading at much more palatable levels given its 50.3% slid since it hit $148.76 last fall.

Deutsche Bank analyst Bill Lerner kept a “buy” rating on Las Vegas Sands and put a $94 target on the stock, while Jefferies & Co. analyst Lawrence Klatzkin did the same while cutting his price target just slightly to $116. It’s all about growth potential, and Las Vegas Sands has it.

Related Articles:

Las Vegas Sands in Search of Share Price Stabilization

Comments

[stacked up]

A very poorly written article indeed. What the "writer" fails to enlighten the reader on is the very crux of the problem for the casino operators in Macau ; the junket companies that bring the VIP's to the casinos.
These junket companies are so lethal they exact a commission on each VIP gambler that is tantamount to extortion, sometimes ranging in the 40% area !! (Quite a healthy commission indeed ! Especially in light of the fact that the junket companies take no risk, invest not one penny, they just extort commissions. Which, by the way is the foundation for all Macau gambling related ventures; they are all controlled by the Stanley Ho family...Even the ferry to Macau is owned by a Ho family member. Whether covert or overt the Ho family is totally involved in every single facet of the Macau island.
Hence, Stanley Ho and his family aka; den of thieves, simply will not let the American casinos prosper on the level they should. Hence, the analysts are, as usual, wrong.
By the way, this useless article also failed to state the very important fact that ONLY junket companies can extend credit to Chinese gamblers...Hence, a VIP (sucker) MUST book with a junket company in order to get credit extended in the casinos ..Credit, as in life-blood of a casino...
At this time, casino stocks are NOT the place to be....

[tagthatstock]

casino's are where the money is (banks cant say that) the asians are like a flock of birds addicted birds to games.

i will always bet on steve wynn.

as for valuations.......wynn stats are very near IBD breakout stats and is underpriced considering the asian revs before/during and after the olympics. dont be surprised if wynn is all the rage in a few months like aapl is now.

[drmalaka]

If you have been to Vegas lately you will notice that the town now revolves around a lot more than gambling. Ten years ago if you showed up at the Mirage and dropped a couple of grand on the table your room and food was free, comp city. Now you need to gamble considerably more to get comps. The reason is that the casinos now look to things other than gambling for profits. When you move away from gambling and diversify into other forms of revenues you lose the advantage of having a recession proof business.

[False Profit]

Both stocks are probably worth half where they are now. LVS's operating income isn't even covering its interest expense. Both are generating negative free cash flow due to high capex. Maybe revenues will increase, but so will depreciation. I don't see how earnings are going to grow. There is a real risk that they will go bankrupt.

[jimmy46]

@stacked up
good comments about the junket "commissions"... thx

[tagthatstock]

wynn bankrupt? lmao. when times get really tough those casino's are gonna fill up with more losers looking to 'strike it rich', meantime i hope cramer and others are loading short positions,, cause its gonna be nasty when wallstreet calls in those shares.

[tenor]

$1.5 billion of cash on hand
$1.8 billion available on existing credit facilities..

Bankrupt ?!?

Dream on Falseprofit :-)

Wynn shows strong resistance in the 87 usd area.