Vegas casinos have increased their promotions in order to lure visitors back to Sin City, and it appears to finally be taking hold as consumer confidence slowly improves. As we all know, the house has the mathematical advantage, so the trick is to find ways to attract new and bigger players. If a casino can manage to bring in more action, the odds will work in their favor. So, with the new bullish data on gambling activity (particularly on the strip), we are looking at three very different gaming companies that might fit the needs of opportunistic investors.
1) Wynn Resorts (WYNN)
Wynn Resorts is one of the premier names in Las Vegas gambling with some of the most grand and luxurious hotels and casinos around. After more than tripling in the last twelve months, this is not a traditional value stock. It is the growth that is attractive about Wynn Resorts, which is still a relatively new company, only becoming public in late 2002. From fiscal 2005 through fiscal 2009, WYNN more than quadrupled revenue, and we believe double digit growth over the next two years is certainly not out of the question. Wynn operates a casino in China’s Macau which is seeing very impressive growth and accounted for nearly 60% of the company’s revenue in 2009. The Macau resort fared better than did Wynn’s Las Vegas properties during the recession, but if they can get both areas running on full steam the stock could really soar. If the turnaround in Las Vegas continues and Macau stays hot, future profits will justify the current high earnings multiple.
Risks associated with WYNN include increased Chinese regulation over Macau gaming, which could threaten profitability overnight. Also, Wynn has a substantial debt load after building its luxury resorts, and at the end of their last fiscal year debt to assets stood at 47%. Management has lowered the debt load over the past year from 63% of assets, but we would not be surprised to see further growth initiatives particularly in Macau. Today, WYNN announced that they will not pursue an investment in a project at Foxwoods Casinos in Philadelphia, PA, which is a nod to spending restraint. In our analysis, increased debt is not a bad thing as long as it is accompanied by strong revenue growth, which at this point seems to be the case.
2) Boyd Gaming Corp. (BYD)
Boyd Gaming Corp. is on the other end of the Vegas spectrum from Wynn, as they look to attract the middle-class gamer with 16 resorts spanning across 6 different states. Boyd Gaming may not have the flashy growth or high end appeal of a Wynn, it sure is a lot cheaper based on the fundamentals. In comparison to WYNN, Boyd’s price-to-sales per share is just about one-sixth, and price-to-cash earnings are one-fifth of WYNN. Furthermore, both price-to-sales and price-to-cash earnings for BYD currently sit well below the historically normal range that the market has traditionally paid for their shares. 7 of Boyd’s casinos are located in Las Vegas, so they would likely benefit from an increase in gaming activity.
Boyd, like most casinos, also has a substantial debt burden, but unlike WYNN it has not had the revenue growth to support it. The stock gained 12.5% on Thursday on volume that was about six times the average day, and there has been increasing speculation over a potential buyout. Options traders have latched onto this rumor and call buying outpaced puts by 19.4 to 1 on Wednesday. We think that their is still potential for it to run higher, but value investors may want to wait for a pull back.
3) Isle of Capri Casinos (ISLE)
Isle of Capri Casinos would be a casino stock for those that don’t believe in the Las Vegas revival. With 14 properties located primarily on the midwestern and southern US, this is the anti-Wynn with few frills. This company is in the midst of a much needed turnaround, which means it could be the best option for a long term, deep value investor. They currently trade for a price-to-sales of .32x, which is far lower than the other companies featured here. They are expected to lose money both this year and the next, but cash earnings–which strip out non-cash charges like depreciation, good will, etc– is expected to be positive and growing. Isle of Capricurrently trades near the low end of its historical normal price-to-cash earnings trading range of 3.0x to 8.7x, which again is cheaper than the other two.
The problem is that this company has even more debt than WYNN or BYD compared to assets at nearly 73% as of their most recent quarterly report. Furthermore, their geographically diverse casinos will almost certainly lag Las Vegas in growth over the longer term.
All three of these companies present reasonably attractive valuations, but all for very different reasons. Gaming stocks can be extremely volatile thanks the highly leveraged nature of their business. We think out of all the gaming stocks these three offer something unique to investors. To be sure, these stocks would not normally fit our investing style, but every portfolio should have at least some exposure a speculative stock or two. In other words, sometimes its good to roll the dice.
Ockham Research Staff