Value investor Mario Gabelli (Trades, Portfolio) is always good for a few interesting stock picks. He just appeared on CNBC and shared stocks he had been buying last Friday and his perspective on a couple of long-time holdings like the Wynn Resorts (WYNN, Financial).
Wynn
Gabelli calls Steve Wynn a creative genius. Macau (the Chinese Las Vegas) is bottoming out. Wynn is building a $4.2 billio hotel on the Cotai strip there, which is supposed to open in the next 90 days. Wynn is also putting up a hotel in Boston, which is an underserved market. There is strong earnings growth to be expected in the next few years.
Wynn has been on a tear (up about 50%) since I last wrote about it on GuruFocus in an October 2015 article, but its fundamentals are still reasonably attractive. While it's no longer a steal, its prospects are a bit more clear. Although the forward P/E ratio is well in excess of 20, the firm has a huge competitive advantage because of its license to operate a casino in Macau. Only a handful of operators are allowed that privilege, limiting competition.
MGM Resorts International (MGM, Financial)
Gabelli likes MGM's significant benefits from financial engineering through a REIT spin-off. There is also significant insider ownership here and on a fundamental basis, it is a little bit cheaper than Wynn Resorts at a forward P/E of 22, but more notably on a current earnings basis with an EV/EBITDA of just 12x. Debt is at very high levels (6x EBITDA), but the REIT structure should remedy that to a large extent.
Pinnacle Entertainment is a smaller company with a market cap of just $2 billion. It stands to benefit from a REIT structure as well. On an EV/EBITDA basis, it is much more attractive compared to Wynn Resorts and even compared to MGM. On the downside, it's still heavily leveraged and insider ownership is on the low side.
Ryman Hospitality (RHP, Financial)
The most creative and interesting pick is perhaps Ryman Hospitality. MGM is building a casino 300 yards away from Ryman's property. The MGM property will also have about 500 rooms, so at first glance it looks like increased competition. However, Ryman's property in that spot has 5,000 rooms and the advantage of a casino nearby probably outweighs the additional competition for rooms. On an EV/EBITDA basis, the company trades at roughly 13x. Debt is on the high side at about four turns of EBITDA. Insider ownership is limited to 3.26%, but the company does pay a steep dividend of 5.97%.
Madison Square Garden (MSG, Financial)
Okay, maybe this isn't the most creative Gabelli pick, as he also touts Madison Square Garden hoping it gets in the e-sports business. Gabelli would love to see League of Legends being played at the garden. I don't blame you if you have no idea what e-sports or League of Legends are. There is a trend where millenials are interested in watching competitive formats of video games. It is the reason for the Amazon (AMZN, Financial) Twitch acquisition, and this is a fast growing sector. It is interesting to watch how the options to bet on these games are expanding. League of Legends is a game that's quite popular. MSG is a $4 billion company, trading at an EV/EBITDA of 17.38x and at a PB of 1.4x.
Lennar Corp. (LEN.B, Financial)
The voting stock of Lennar B shares trades at a discount to the non-voting, and that is going to narrow. Gabelli also likes the company and what the CEO is doing there.
To understand the pricing logic behind voting power, Aswath Damodaran's paper called Value of Control is a good read. In a nutshell it boils down to:
The market price for every publicly traded firm should incorporate an expected value of control, as a function of the value of control and the probability of control changing.
Market value = Status quo value + (Optimal value - Status quo value)* Probability of management changing
I've written an article about the voting and non-voting shares of Google (GOOG, Financial) (GOOGL, Financial) which can also be helpful to understand the concept. Meanwhile the company trades at a price/book ratio of 1.41x and an EV/EBITDA of 12x.
Mueller Industries (MLI, Financial)
Gabelli's final pick is Mueller Industries, which is a bit off theme, but he calls it a great cash generator with a well-run business, and expects over the next three or four years it will go up between 50% to 100%. It trades at a forward P/E of 14.57 and on a EV/EBITDA of 9.94x. It has only a little bit of debt, roughly one turn of EBITDA, and there is quite a bit of insider ownership at 10%.
