The Casinos and Resorts companies experienced one of their best moments in recent times after a rampup in Macau gaming revenue over the last two months.
The news of how Macau gaming revenue has improved in the past few months, especially in February, broke at the beginning of this month sending several gaming stocks up. Among the beneficiaries was Las Vegas Sands (LVS, Financial), a stock that has had its fair share of bad news following a continuous slowdown in the top line.
Other companies that showed massive stock price improvement include Macau-focused gaming company Melco Crown (MPEL, Financial) along with Wynn Resorts (WYNN, Financial) and MGM Resorts (MGM, Financial).
All these companies have been struggling over the last few quarters to report revenue and profit growth as demonstrated in the chart below, but following the recent numbers from Macau, a rebound could be in the cards.
Could Macau save the day?
According to the latest data from Macau’s Gaming Inspection and Coordination Bureau, gross gaming revenue declined by just 0.1% in February to $2.4 billion on a year-over-year basis.
This is the smallest decline in revenue for several months, and it coincides with a period when gaming revenue from the region appears to have hit bottom despite still being very volatile. The average monthly gaming revenue from Macau casinos and resorts has been in the region of about $2.3 billion in the last six months; in the last three months, the region has managed to maintain sequential growth in gaming revenue.
In December 2015, gross gaming revenue from Macau was 18.3 billion HKD; in January the figure increased to 18.6 billion HKD before hitting 19.5 billion HKD in February. This sequence coupled with a very small drop in gaming revenue on a year-over-year basis (versus other periods) has led investors to believe the industry, particularly the Macau market, may have turned a corner.
The increased revenue is primarily due to the increase in new gamers who have signed up. Casino companies are exploring several ways to increase the number of players on their tables as well as via various online platforms. And while various review platforms like this one continue to play a small part in directing players to the various casino slots, they could eventually play a major part for gaming companies to be able to match supply with demand.
Over the next few quarters, two new resorts will open doors to the Macau gaming market including Las Vegas Sands’ “The Parisian,” which will begin operation later this year, and Wynn Resort’s “Wynn Palace,” which is scheduled to open by June. This is in addition to Melco Crown’s “Studio City,” which opened last year, while MGM Resorts and others are also expected to expand or open new resorts in the region in the near future.
As such, this means that there will be too much demand that is barely matched by supply unless the gaming companies find other alternatives to bring more players to their tables. Failure to match demand and supply could bottleneck the current recovery campaign and subsequently drive out optimism in casinos and resorts stocks.
Nonetheless, when you look at Las Vegas Sands from a fundamental perspective, the company looks particularly attractive when compared to peers. Despite the recent revenue and net income declines, Las Vegas Sands still boasts very good margins. Its gross margin of 76% compared to the 54% industry average is particularly good and when you look at Wynn’s 38% and MGM’s 41%, then you could be wooed to buy Las Vegas Sands.
Las Vegas Sands' operating margin also trumps its peers’ margins at 25% compared to MGM’s 12% and Wynn’s 16% while the industry average is pegged at 12%.
Las Vegas Sands also appears to be cheaply priced at the current P/E ratio of 19.84 times compared to the industry average of 24.59X. This also compares positively to Wynn’s P/E of 41.81x while MGM is currently not profitable based on the trailing 12 months EPS. As such, despite the recent rally, Las Vegas Sands could yet be an attractive buy at least for now.
Conclusion
Las Vegas Sands looks fundamentally stable when compared to peers in the industry. However, the company’s stock price has risen significantly over the last few weeks following the good news from Macau that positively affected all casino and resort companies with operations in the region.
In the last few trading sessions, though, the price of the stock appears to have taken a temporary pullback following the massive buying activity that took place in the last two weeks. However, based on a valuation perspective, there could still be some time to buy the stock and the recent pullback may have just gold-coated the opportunity.
Nonetheless, it may not be wise to bet heavily on the promise of Macau gaming revenue, because as noted, there are still certain challenges in the market, among them the rapid increase in resorts in the region that will require being matched by a similar supply for sustainable revenue growth.
