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Can Casino ETF Surge Ahead Despite Mixed Earnings?

Zacks Equity Research

Casino earnings are always a tale of two cities – Macau and Las Vegas. While these stocks have long been stymied by the choppy Macau business, especially from the VIP segment, the other key region– Las Vegas – is yet to show full-fledged recovery.

Credit crunch issues in mainland China, check on illegal money transfers especially in VIP gaming and a broad-based slowdown in China wreaked havoc on the Macau business. However, things have started to change for the better lately (read: Profit from These ETFs if China Turmoil Continues).

The decline in Macau’s gaming revenues in July was narrower than what analysts expected. The Macau legislator too indicated that the industry there is finally ‘stabilizing”.Against this background, casino stocks reported earnings results in the last few days. Let’s take a look at how things are shaping up on the earnings front (read: Q2 Earnings to Gather Steam: 4 Sector ETFs & Stocks to Play).

Q2 Earnings in Detail

Wynn Resorts Ltd.’s WYNN adjusted earnings of $1.07 per share were 44.6% higher year over year and beat the Zacks Consensus Estimate of $0.97. Revenues of $1.06 billion outpaced the consensus mark of $1.02 billion and grew 1.7% year over year, owing to a 3.6% improvement in Macau revenue, partly offset by 1.1% lower revenues in Las Vegas.

Despite a both-line beat, what hurt the stock was lower baccarat table allotment (against analyst expectations) in the new $4.1 billion casino in Macau, as perBloomberg. Also, betting by high rollers in Macau, the major revenue and profit drivers of the company, plunged 24%. This signals trouble for the casino operator in the near term.

The stock lost over 6.4% on July 29, after reporting earnings (see all the Consumer Discretionary ETFs here).

On July 25, Las Vegas Sands Corp. LVS came up with second-quarter 2016 adjusted earnings per share of $0.52 that missed the Zacks Consensus Estimate of $0.56. Adjusted EPS declined about 13.3% year over year due to lower revenues and profits.

Quarterly net revenue of $2.65 billion missed the Zacks Consensus Estimate of $2.74 billion and declined 9.3% year over year due to weak performance in Macau. Net revenues from Las Vegas operations increased 3% year over year.

Despite this, LVS stock added over 7% in the last five trading sessions (as of July 29, 2016). The company stated that Macau is showing signs of stabilization, primarily in the mass market, despite the ongoing gloom. This word of optimism might have propelled the stock post earnings release.

MGM Resorts International (MGM), which is yet to report earnings, has a Zacks Rank #3 (Hold) and an Earnings ESP of negative 24%, at the time of writing. Our proven model does not conclusively show that MGM Resorts is less likely to beat on earnings since a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat. 

What Lies Ahead for the Casino ETF?

The impact of mixed earnings should be felt in the casino gaming ETF Vaneck Vectors Gaming ETF BJK as the duo has found a place in the top 10 holdings of the fund with a considerable share.

Investors should note that the Zacks Industry Rank of the above-mentioned stocks is in the top 23%, at the time of writing. While WYNN has a Zacks Rank #2 (Buy), LVS has a Zacks Rank #3 (Hold).  

While the earnings of the duo give mixed signals, there is a recovery hope lurking on the Macau front. Investors thus may seek to keep a watch on the casino ETF in the coming days and a closer look at the details of this fund is thus warranted (read: Best ETFs of July):

 BJK in Focus

The fund looks to provide investors a direct exposure to the casino gaming market.  The fund has so far attracted $18.9 million in assets with 43 holdings. The product is expensive as it charges 66 bps in fees per year.

Both companies –Las Vegas Sands and Sands China – have about 15% exposure in BJK. Mgm Resorts International and MGM China – together take about 7.3% of the fund. Wynn Resorts and Wynn Macau together take about 3.95% of the fund.

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LAS VEGAS SANDS (LVS): Free Stock Analysis Report
WYNN RESRTS LTD (WYNN): Free Stock Analysis Report
MGM RESORTS INT (MGM): Free Stock Analysis Report
VANECK-GAMING (BJK): ETF Research Reports
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