BUY OR SELL-Casino stocks: good bets or risky gambles?
Mon Jun 1, 2009 2:11pm IST Email | Print | Share| Single Page[-] Text [+] * Las Vegas Sands, Wynn look good for Asian exposure
* MGM looks shaky on high debt load, small Macau business
* Macau gaming stocks hot for higher growth potential (For other Reuters BUY OR SELL items, click [BUYSELL/])
By Sui-Lee Wee
HONG KONG, June 1 (Reuters) - Casino stocks have had a recent winning streak, fuelled by hopes that some debt-heavy firms have staved off bankruptcy and a betting sector slump has hit bottom.
Among top global gaming stocks, Las Vegas Sands (LVS.N: Quote, Profile, Research) has more than quadrupled since March, versus the Dow Jones industrial average's .DJI 19 percent gain, while MGM Mirage (MGM.N: Quote, Profile, Research) has more than doubled and Wynn Resorts (WYNN.O: Quote, Profile, Research) is up 74 percent.
But the shares still trade well below year-ago levels, and most analysts rate them a "hold" -- advising investors to take a wait-and-see approach before making any moves.
(For a global gaming sector package, click [ID:nHKG213363])
ASIAN JACKPOT
With more than half their operating profits earned in the Chinese gambling enclave of Macau, Sands and Wynn are the preferred choice for investors who want exposure to Asia's more resilient gaming capital than to a volatile Las Vegas.
Pure Macau plays such as Galaxy Entertainment Group (0027.HK: Quote, Profile, Research), Melco Crown Entertainment (MPEL.O: Quote, Profile, Research) and SJM Holdings (0880.HK: Quote, Profile, Research) have nearly doubled or more since March.
Macau, the world's biggest gaming market, is likely to return to a growth track by September, but the third quarter in Las Vegas is expected to remain weak, analysts said. [ID:nHKG261502]
Sands, which operates two casinos in Macau, opens Singapore's first mega-casino late this year or in early 2010.
"The Singapore casino looks like it'll be a slam dunk for them," said analyst Janet Brashear of Sanford Bernstein. "That stock has lots of upside potential, if they can get over their covenant issues. But it's a high-risk, high-reward situation."
For a safer bet, some analysts recommend Wynn, which has the strongest balance sheet among its peers and is slated to open a second Macau casino next May.
On a 2009 enterprise value to EBITDA ratio (EV/EBITDA), Wynn trades around 13.2 times, lower than Sands' 18.8 times, but above MGM's 8.1 times, according to UBS.
HOUSE OF CARDS
Given the brutal global economy, there's no guarantee that Macau will offset weakness at the Strip for Wynn and Sands. A stream of new Las Vegas casinos is likely to create a supply glut and margins could feel the pinch as Melco Crown and MGM open new properties this year.
Some say avoid MGM due to its heavy Strip exposure, a $14 billion debt load and a relatively small Macau business.
"They're struggling under enormous debt that can constrain how they will operate in the next few years and they have few opportunities to grow," Brashear said, predicting MGM would remain unprofitable until 2014.
While pure Macau plays look good, some caution the family-run nature of Asian companies may make them riskier longer term bets.
"It's the question of us getting enough comfort from those families that run some of these casinos," said Nicholas Yeo, fund manager at Aberdeen Asset Management. "We're not sure what's going on behind the scenes."
Others also argue a recent run-up in casino stocks could mean the sector is due for a correction.
"The valuations are rich and that leaves little room for error," said Credit Suisse analyst Gabriel Chan, referring to Macau stocks. He recently downgraded Melco Crown due to its high share price. (Editing by Doug Young & Ian Geoghegan)
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