Macau has reinvigorated the sector.
I cannot think of a better investment in which the odds are stacked against someone using a product, yet they will return again and again to use it, and have all their money siphoned away.
I am speaking, of course, of casinos. All casino games are stacked in favor of the house. Even the best games still give the house an edge. And yet, people all over the world chase the dream of being the one who defies the odds.
Resorts attached to casinos are even more attractive, because people will pay to stay in a room there, pay even more for food and booze, then get drunk and be in even less control of themselves, and lose even more money.
Alas, Las Vegas really got hammered in the financial crisis. The recession resulted in people cutting back on travel, they stopped spending money, and stopped gambling. The resorts had a lot of debt to service. Cash flow fell.
Yet things are slowly picking back up in Las Vegas, and all the major companies have opened resorts in Macau. While revenue there has been volatile as a game of craps, it remains a growth engine.
The stocks may be worth a look. But which one do you choose?
Steve Wynn is a survivor. He’s been in Vegas for decades, starting off as a liquor salesman. He sold off his casino assets in 2000 to MGM Grand and became a billionaire. Then he opened Wynn Resorts (NASDAQ: WYNN).
Wynn wanted to make sure he had the liquidity to upgrade the resort every few years so it would remain competitive with the ever-changing Vegas landscape. He raised several hundred million dollars in an IPO, he and his partner put up more equity, and he drew only 40% leverage to build the resort. Wynn paid down a lot of that debt, and has since taken on more to open up in Macau. The company sits on over $7 billion in debt , but the 5% debt service is easily handled by cash flow. Remaining FCF is paid out to shareholders as a dividend.
Despite the recession, the company remains cash flow positive, its expansion into Macau has been a gigantic hit, and Wynn is so confident in his company that he just announced a special $5-per-share dividend. The company trades at 23 times this year’s estimates with long term EPS growth pegged at 15% annualized.
Wynn is a winner, although slightly overpriced right now. I would buy in on any large dip.
Las Vegas Sands (NYSE:LVS) also is a good choice. LVS is trading at 18.5x earnings on 16.5% long term annualized growth. While dealing with more debt ($9.9 billion), the company came off a horrible 2009 loss of $540 million to a $407 million 2010 profit, and then went on to three years of great results with net income of $1.27 billion, $1.52 billion, and $2.3 billion, respectively. FCF, which had been negative in FY10, increased to $1.1 billion, $1.5 billion, and $3.5 billion, respectively, since then. This feels like a slightly better deal than WYNN at the moment.
As for MGM Resorts International (NYSE:MGM), I have to say that I was skeptical on the company’s survival back in 2010. The company had the misfortune of undertaking the massively expensive CityCenter project right when the financial crisis hit. It looked like a massive write-off. MGM has almost $13 billion in debt. Its debt service drags the company into the red, although not as badly as it had been.
While MGM has stemmed the blood loss this year — and has some impressively improved its FCF — that debt burden is a killer. Then again, the stock has repeatedly found a bottom around $9, and is now at $25 per share. Somebody out there is optimistic, and I absolutely acknowledge that I am totally missing something here.
Lawrence Meyers does not own shares of any company mentioned.
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