Casino Stocks Dive on Macau Growth Concerns: Buy Here or Jump Ship?

Includes: LVS, MGM, WYNN
by: Chris Krasowski

The major Casino players have been on quite a run during the late summer months, seemingly hitting new highs daily. The front runners have been Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN) and MGM-Mirage (NYSE:MGM) and the almost meteoric rise was substantially due to the expectations of growth in the sector in Far East regions like Macau.

Last week's news, however, has given major Casino players quite the haircut. LVS and WYNN, which are two of the biggest players in Macau, were most hurt by the news that year over year revenue growth for gambling in the region would be only 55%. Only 55%? That's it, ballgame over. Not so fast, but as with all things growth, and you better believe it, Casinos are now growth oriented businesses, comes the gift and the curse that is expectations. The Morgan Stanley analyst who reported views of a softer than expected growth rate was expecting growth to top 75% year over year in the region. When you're talking about huge growth, any "miss" will lead to deflation and some investor panic.

Sometimes though, growth numbers get thrown around in bunches ever so higher and it takes a session of humility to bring those valuations in check. I think we have that in this case and Macau, even at more realistic growth projections, is still the real deal as the biggest gambling spot on the planet.

So as LVS and WYNN drop 12% and 10% respectively, it's time to appreciate the opportunity that has finally been given to own these companies. The casino operators will be a sustainable and substantial business going forward and as a long term investor owning a Casino has got to be right up there with owning a Stock Exchange, an Alcohol company, Food & Beverage, Diapers, Soap and Taxes (If you could invest in a piece of a good government!).The last time I had to chance to speak about Casino stocks was almost 2 months ago ("MGM Mirage: The Most Attractive Gambling Stock") and of the 5 companies I mentioned, I thought that MGM, LVS and WYNN were the only ways to consider playing, leaving Trump (TRMP) and Harrah's (HET) by the way side.

My recommendation on a valuation and forward basis at that time was MGM simply because it was very well positioned in its growth prospects and had not received an outlandish P/E ratio that would bring about higher downside risks. When I wrote the article I said that LVS had been the Tortoise, WYNN was the Hare and MGM might just end up being the Lion. Here;s how things have fared since that article:

  • LVS: +52%
  • WYNN: +48%
  • MGM: +29%
  • HET: +3%
  • TRMP: -6%

It's clear that the Casino stocks have done very well of late, and I'd love to toot the horn but I missed the party too. I wrote about the stocks but didn't own a single one and while MGM has seen LVS and WYNN breeze past it in terms of gains, I'm sticking with MGM as my Lion. The 10%+ haircuts given to WYNN and LVS make them more attractive going forward but LVS has a P/E of 135 and forward P/E of 30, while MGM sits at P/E ratios of 30 after its 3% drop last Tuesday.

To me, LVS has a lot more to sustain in order to continue rising and any hint of a slow down in growth will be met with much bigger waves by the market. Then again sometimes you just gotta hit 16.

Disclosure: Author holds no position in any companies mentioned above at the time of writing