Golden Week Should Power These Casino Operators

Includes: LVS, MLCO
by: Bret Jensen

It was reported last week that Macau took in over 900K visitors during the Golden Week holiday. This was over a 12% increase from last year's Chinese holiday. Deutsche Bank came out with comments that October gambling revenue in Macau should be up 17% Y/Y, a new record that will take monthly sales to $4B.

These figures show that the Chinese market, at least the consumer side of the economy, is quite healthy. This bodes well for the casino operators that get a good portion of their revenue in Macau. Here are two attractive plays in the region.

Las Vegas Sands (NYSE:LVS) is a United States based casino operator that gets the majority of its revenues & earnings from Macau. It also is a significant player in Singapore. The stock has risen more than 50% since I penned an article on why I doubled my position just over a year ago. However, the company is still well-positioned to continue to benefit from Macau's long term growth.

The company has doubled its operational cash flow since the end of FY2010. Las Vegas Sands has also posted consistent impressive earnings & revenue growth over the past half-decade. Over the past five years the company has grown revenues at a ~25% annual rate and earnings have increased at a ~35% annual pace.

Las Vegas Sands also has significant retail properties outside of casinos that could be worth some $10B and could be sold off or spun off as a REIT. The stock pays a 2% dividend which it just initiated in 2012. It has already increased its dividend 40% over its original payout as well as paid a special dividend. I would look for significant dividend growth in coming years as the firm's operational cash flow continues to post solid increases.

Melco Crown Entertainment (MPEL) operates a couple of casinos as well as 20 some restaurants and 70 retail outlets in Macau. Consensus earnings estimates for both FY2013 & FY2014 have risen significantly over the past three months and the company crushed bottom line expectations on its last quarterly earnings report.

The company has a solid balance sheet and has more than doubled operational cash flow since the end of FY2010. Revenues are tracking to more than a 20% gain this fiscal year and the stock has a five year projected PEG of just over 1 (1.15).

Macquarie just upgraded the stock to "Outperform" from "Neutral". The company is also Citi's top pick in Macau and HSBC Securities went to "Overweight" on Melco in September. The company is also well positioned should Japan open up to gambling as speculated.

Both of the companies should benefit from a robust Golden Week and the long term growth of gambling in Asia. They are good selections for long term growth investors.

Disclosure: I am long LVS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.