Glenn Rogers writes:
Wall Street has often been compared to a casino and there have been times in the last couple of years that it's been hard to disagree. This got me thinking about real casinos so I decided to look at some of the major players that make money out of gambling to see if there might be some opportunities to share in their profits.
Actually, I've been in and out of the casino stocks for a number of years and it looks as though they may be position for another good run over the next several months. I'm particularly interested in finding some alternatives to commodities, which have had a fantastic run in the last couple of years but seem to be rolling over lately. Granted, this may be another buying opportunity for resources but it's never a bad idea to diversify by shifting some capital to a different sector.
There are number of ways to play the casino market. My two favourites are Wynn Resorts Ltd. (WYNN) and Las Vegas Sands (LVS). I prefer Las Vegas Sands even though it tends to be more volatile since it is much less expensive and normally trades in tandem with Wynn.
The reason I especially like these companies is that they have greater exposure to Asia in general and China in particular through their properties in Macau and, in the case of Las Vegas Sands, a brand-new casino in Singapore. This helps to provide tremendous growth potential and is a counterweight to their Las Vegas properties which have been adversely affected by the U.S. economic downturn.
Macau was a Portuguese territory which was turned back to the Chinese, as was Hong Kong, marking an end to the last vestiges of colonial expansion in that part of the world. As in Hong Kong, the Chinese have for the most part left Macau alone, allowing companies like Wynn and Las Vegas Sands to operate their properties without excessive government interference.
The gaming business in Macau was expected to grow by 30% this year and so far this quarter they are beating those expectations with January showing a 33.2% increase while February was up an amazing 47.7%. In March, Macau's casinos took in more than US$2.5 billion.
Las Vegas Sands has four properties in Macao, including a Four Seasons hotel and casino, with operating margins of over 31%. The company plans to add more than 13.3 million square feet on two additional parcels they own in Macao which will translate into another 6,400 hotel rooms. This is phenomenal growth by any measure.
There's more! Las Vegas Sands is enjoying phenomenal growth in Singapore as well. Their Marina Bay Sands property has been open only a year and produced EBITDA of over US$300 million during the most recent quarter with an operating margin of 54.6%. In the fourth quarter of last year, EBITDA increased by 141% to US$738.9 million on net revenues of US$2.02 billion.
Of course, we shouldn't ignore the Las Vegas properties which generated EBITDA of US$80.6 million in the fourth quarter of 2010, up more than 40% from the same period in 2009. Even though the operating margins on the U.S. properties are only 25.9 %, they are still throwing off cash flow. As the economy improves, the company will benefit from increased convention business and tourist traffic.
But wait, there's still more! There is a chance that Congress may finally say yes to Internet gambling. If that happens, it will provide a large additional revenue stream for all the major casinos and Las Vegas Sands will certainly benefit as much or more as any of them. This is controversial but influential Sen. Harry Reid of Nevada has been floating this idea so it is certainly more than a pipe dream. That said, it's certainly not a primary reason to buy the stock but it may well provide additional momentum to the upside if and when on-line gambling in the U.S. is approved.
So what could go wrong? For starters, the company is carrying a lot of debt although it appears to have the free cash flow to handle the interest payments and money is cheap these days. Also, there is an ongoing legal case brought by a former executive who used to head up their Macau operations. He is alleging wrongful dismissal and seeking punitive damages so there's some headline risk but in the greater scheme of things this will turn out to be small potatoes.
To sum up, I think this is an interesting way to take advantage of relatively stable North American operation combined with a high-growth Asian play. At its peak in October, 2007 this stock rose to nearly US$140. Can it get there again? I don't know but I certainly believe it can reach US$60. The shares closed on Friday at US$44.13.
Action now: Buy with a target of US$60.