Is it Time to Roll the Dice on Casino Stock?

Indie Research

Last week, BullMarket.com looked at several casino stocks, including Las Vegas Sands (LVS), Wynn Resorts (WYNN), Caesar's Entertainment (CZR), MGM Resorts International (MGM), and Penn National Gaming (PENN).

They tend to be subject to big swings and right now sentiment towards the sector is generally muted. For those companies with exposure to Macau, the concern is that the growth has slowed at the Asian gambling hot spot. Back at home, increased competition and the uneven recovery have pressured some of the domestically focused names.

Here is an abbreviated summary of what BullMarket.com wrote about Las Vegas Sands:

LVS operates the Palazzo and Venetian resorts in resorts in Las Vegas, but the lion's share of its revenue and profit comes from its properties on the Chinese island of Macau and a new hotel-casino in Singapore. Its casino resorts in Las Vegas are adjacent to the Sands Expo and Convention Center. It also owns a casino in Bethlehem, Pennsylvania, and is looking to expand in Vietnam, South Korea, and elsewhere in Asia.

Overseas, it operates the Marina Bay Sands in Singapore, which opened in April 2010. LVS operates a Venetian resort on the island of Macau through its majority-owned Sands China subsidiary. It also has a Four Seasons Hotel and Four Seasons-branded apartments at its development on the island's Cotai Strip, plus the Sands Macao on the Macau peninsula.

The company's shares were range-bound through much of 2011 but took another leg higher at the start of 2012 as they followed the broader market. The drop over the last six to eight weeks has returned LVS's shares to the middle of its 2011 range of upper $30s to low $50s. Sentiment appears to have become more guarded towards the name because of concerns over China's overall growth and the slower growth in Macau.

Macau's revenue from gambling rose by 7.3% year over year in May, but that increase was down sharply from the 22% increase reported for April. It was the slowest rate of growth on the island in three years. Macau is now the biggest gambling destination in the world, outpacing Las Vegas with $33.5 billion in revenue last year. The former Portuguese colony sits on China's southern coast, 35 miles from Hong Kong, drawing affluent gamblers from around Asia.

LVS opened the newest property, its casino hotel on the Cotai Strip, Macau's answer to the Las Vegas Strip, in April.

The company's executives have been on the road quite bit the last couple of weeks, a period when the stock has been dropping, which prompted President and COO Michael Leven to quip last week that it was time to go home because he'd "done a lousy job."

"We're very pleased with what the company's accomplished in 2011 and in the first quarter of 2012. And although the wind seem to be blowing with some level of deterioration of the VIP market in Macau, our business continues to hold up and we continue to do well and the future looks very bright for us. Our management, our product, our cash flow, our barriers to entry and our reputation has been enhanced dramatically over the last number of years, and we think the company is well positioned to advantage of the markets we're in," Leven remarked at a gaming, restaurant, and leisure conference on June 4th sponsored by Goldman Sachs.

"We think we're in a best gaming market in the world in Macau with great positioning," he added. LVS says it has 40% to 50% of the non-casino hotel market rooms in Macau. ...

Back at home, the overall market in Las Vegas has been weaker of late, but LVS's properties have performed well. According to data released by the Nevada Gaming Control Board, gambling revenue fell by nearly -11% in March to $854.6 million. The Las Vegas Strip led the decline with a nearly -15% drop to $448.7 million. LVS, however, wasn't among the losers as its Strip revenue grew by 1.0%

The company reported a solid first quarter. Its profits more than doubled year over year and revenue grew by nearly 31%. Its Singapore property reported a 51% increase in gambling revenue to $701.3 million, while it nearly doubled in Las Vegas to $158.7 million. Revenue from Macau jumped by 25% to $1.45 billion. Companywide net revenue grew by 31% to $2.76 billion.

The company reported its net income totaled $498.9 million, or 61 cents per share, more than double the $228.2 million, or 28 cents share, it earned in Q1 2011.

Its adjusted net income grew to $569.8 million, or to 70 cents per share after the exclusion of one-time items, up from 37 cents a year ago. The result was 10 cents per share better than the Wall Street consensus estimate.

Management credited baccarat with fueling the gains in Las Vegas, with wagering on table games up 28% from last year at its Palazzo and Venetian resorts to $609 million. Those properties reported $115 million in adjusted property EBITDA. Its Sands property in Bethlehem, Pennsylvania, reported what the company said was a record quarter with $27.5 million in adjusted property EBITDA. ...

We agree that the sell-off in the shares of Las Vegas Sands appears to be overdone as well as an overreaction to economic news out of China that relatively speaking isn't so horrible. LVS has the newest property on Macau and with a new planned property on the Cotai Strip from Wynn still years away, it is in a very strong position. One would expect growth to slow at some point in Macau but barring an economic calamity, the region would still seem ripe for continued expansion. Having said that, we suspect some potential buyers of the stock are waiting to see if the May figures were a one-month aberration or the start of a trend towards slower growth.

We continue to view LVS as one of the best positioned of the U.S. gaming companies given its Asian footprint; we think it will remain a long-term tailwind for the industry operators located in the region and LVS in particular. The company still has a lot of debt but it has reworked the maturities over the past few years so that it isn't a burden given the company's sizable cash flows. ...

For more on Las Vegas Sands and other casino stocks, visit BullMarket.com.

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