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Should You Bet on Casino ETF with Decent Earnings?

Sanghamitra Saha

Things haven’t looked so pretty in recent times for the casino industry with the mecca of casino gaming – Macau – slowly returning to life. Gaming revenue in Macau grew on an annual basis in October to register three consecutive months of gains after 26 months of declines (read: Top Sectors of Q3 and Their Best ETFs).

As per an article published on Forbes, Morgan Stanley expects third-quarter EBITDA for Macau casino stocks to expand 5% year over year, signifying the first green result for the sector in eight quarters.

Notably, gaming in Macau has been under pressure since June 2014, on credit crunch issues in mainland China, check on illegal money transfers especially in VIP gaming and a broad-based slowdown in China. However, the industry finally started to stabilize after a protracted slowdown. Against this backdrop, casino stocks reported earnings results in the last few days.

Here we highlight earnings of the three big casino and hotel companies, MGM Resorts International MGM, Las Vegas Sands Corp. LVS and Wynn Resorts WYNN).

Among the three, the latest to report was MGM Resorts. On November 7, before the opening bell, MGM Resorts posted adjusted earnings of $0.58 per share, significantly above the Zacks Consensus Estimate of $0.08. Total revenue of $2.52 billion beat the Zacks Consensus Estimate of $2.37 billion by around 6% and jumped 10.3% year over year. The upside reflects a significant increase in Las Vegas operations.

On November 3 after hours, Las Vegas Sands Corp. beat on both lines. Adjusted earnings per share of $0.72 surpassed the Zacks Consensus Estimate of $0.59 and grew 9% year over year due to higher revenues and profits. Quarterly net revenues of $2.97 billion topped the Zacks Consensus Estimate of $2.77 billion and inched up 2.6% year over year due to relatively a better show in Macao.

On November 2, 2016 after hours, Wynn Resorts Ltd. reported lower-than-expected third-quarter 2016 results. Adjusted earnings of $0.75 per share missed the Zacks Consensus Estimate of $0.79 by 5.1%. Further, earnings decreased 12.8% from the year-ago figure due to lower operating income margin.  Wynn Resorts’ revenues of $1.11 billion failed to surpass the Zacks Consensus Estimate of $1.13 billion by 1.8% but increased 11.4% on the back of an improved performance by Las Vegas Operations.

Market Impact

While MGM and Las Vegas Sands amazed investors this quarter, Wynn Resorts failed to do so. Needless to say, MGM and LVS added post earnings while WYNN lost. In the key trading session, MGM stock gained over 2.9% on November 7 while LVS added over 1.7% in the last five days (as of November 7, 2016) and WYNN was off over 7%.

The mixed impact on the industry can be verified by the five-day return of VanEck Vectors Gaming ETF BJK which has sizable exposure to the afore-mentioned stocks. In the last five days (as of November 7, 2016), the fund added about 2.1%. If we rule out WYNN Resorts, a buoyancy is noticed in the industry and often a rising tide lifts all boats in an industry. Moreover, the Zacks Industry Rank of these casino companies is in top 18% at the time of writing.

MGM and WYNN has a Zacks Rank #3 (Hold) while LVS has a Zacks Rank #1 (Strong Buy). While investing in a single stock is always an option, investors can take advantage of the sluggish return of Macau via BJK or the basket approach.

BJK in Focus

The fund looks to track the MVIS Global Gaming Index and provides investors a direct exposure to the casino gaming market. The product has so far been overlooked by investors as is evident from its paltry volume of about 6,000 shares daily.

The fund has so far attracted $19.7 million in assets and invested that in 41 holdings. The product is expensive as it charges 66 bps in fees per year.

All three abovementioned companies have created places in the top-10 holdings of the fund with a considerable share. Both companies – Sands China and Las Vegas Sands – have about 17% exposure in BJK.

MGM Resorts International (7.62%) and MGM China holdings (about 1.34%) call for about 9% of the fund. Wynn Resorts Ltd (2.55%) and Wynn Macau (1.53%) also account for more than 4% of BJK (see all Consumer Discretionary ETFs here).
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