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Nicholas Kitonyi
Nicholas Kitonyi
Articles  | Author's Website |

Is It Time to Buy Blue-Chip Casino Stocks?

Some have plunged recently, opening an attractive window for investors looking for quality stocks

September 04, 2018 | About:

Top casinos and resorts stocks Wynn Resorts Ltd. (NASDAQ:WYNN) and Las Vegas Sands Corp. (NYSE:LVS) have plunged recently after a U.S. Supreme court ruling in May was perceived to have paved the way for legalized sports betting countrywide. Ideally, countrywide legalization would have implied that Nevada's current monopoly would be completely disrupted.

As such, gambling revenues of casino stocks like Wynn Resorts and Las Vegas Sands would have been greatly affected because countrywide legalization would open up opportunities for more players including new startups to join the market. But as details of the ruling continued to emerge over the last few months, it has now become clear that it won't be as easy as initially thought for new players to launch pure-play gambling companies to rival the likes of Wynn and Las Vegas Sands.

The supreme court ruling explained

Experts have explained that the ruling was not actually about whether sports betting should be legal, but rather, whether the federal government can force individual states to enforce certain laws.

Basically, regarding betting, the ruling means that every state is now at liberty to legalize sports betting, which means some might choose to legalize while others might not.

Nonetheless, the announcement still meant that by clearing the ground for more states to legalize sports betting if they chose to, Las Vegas-based casino companies like Wynn Resorts and Las Vegas Sands could face a new challenge, as the move breaks Nevada’s monopoly. Customers who travel from other states to go to Vegas for the purposes of gambling might take the time to assess their options.

Reports already indicate that seven states, including Connecticut, Delaware, Pennsylvania, Iowa, New York, Mississippi and West Virginia have already paved the way for legal sports betting, while 13 others (California, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, Michigan, Missouri, Oklahoma, Rhode Island and South Carolina) have plans or proposals in place to consider legalizing sports betting.

What does this mean for casino companies?

Some of the states that have paved the way for legal sports betting are only approving the activity to take place in already established companies and businesses in the market like in horse racing activities and casinos. Therefore, it is unlikely that new startups local or foreign like Judi Online will have any impact on the incomes of Wynn Resorts and Las Vegas Sands.

Nonetheless, established gambling companies in these states will now have an opportunity to disrupt Nevada's gambling market. But if new markets (new states) mean new customers joining the industry as well, then this ruling could have minimal impact on the gambling incomes of Wynn and Las Vegas Sands.

Furthermore, Wynn and Las Vegas Sands are multi-product businesses and have made huge strides in the resorts and entertainment side of the market.

As such, it is correct to infer that the recent plunge in the prices of the two stocks has probably made them more attractive for investors looking to buy quality stocks that command huge industry moats.

How have Wynn and Las Vegas Sands performed lately?

Shares of Wynn Resorts are down 24.5% over the last six weeks while Las Vegas Sands has dropped 18%. These declines might appear lucrative for contrarian investors, but it is important to assess the value proposition the two companies present given the current market conditions.

Wynn Resorts appears to have a steady flow of top line based on 2017 and 2018 results and when factoring in the expectations for the next two years. However, after delivering a solid bottom line last year, the company’s earnings per share are expected to take a dive this year before recovering in 2019 and 2020.

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Wynn Resorts currently trades at a price-earnings ratio of about 29, which suggests that the stock could be expensively priced based on industry averages, especially looking at MGM Resorts International (NYSE:MGM)'s trailing price-earnings ratio of about 8.

However, when you look at the forward price-earnings ratio, which factors in expected earnings for the next fiscal year and the PEG ratio, Wynn Resorts looks significantly attractive in terms of value proposition with a forward price-earnings ratio of 16 versus MGM’s 20. Its PEG ratio (five-year expected) is also impressive at 1.41. compared to MGM’s 2.65.

On the other hand, Las Vegas Sands, which reported earnings two weeks ago, boasts a strong value proposition as it continues to venture more into the entertainment, resorts and spa services. The company’s trailing price-earnings ratio of 13 and forward price-earnings ratio of 17 indicate that its stock price has a lot of room to run.

In the most recent quarter, Las Vegas Sands also posted strong results that prompted analysts to tick its target price to around $76 per share, implying a potential upside of up to 15%. Las Vegas Sands’ dividend yield of 4.5% trailing and 4.57% forward further supports the analysts’ view that the stock could be potentially undervalued.

Last year, Las Vegas Sands revenue and earnings per share bounced to post significant growth after two consecutive years of declines.

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This growth trend is expected to continue through 2019, especially if the company maintains the performance posted in the recent quarterly earnings.

In summary, both Wynn Resorts and Las Vegas Sands present a strong value proposition for investors who hunt for quality stocks with growth potential. Therefore, even with the Supreme Court ruling looking likely to dent the potential growth for the two companies’ gambling incomes, their portfolios are wide, and this gives them the industry moats they need to continue delivering strong results in the coming years.

Disclosure: I have no positions in the stocks mentioned in the article.

About the author:

Nicholas Kitonyi
Nicholas the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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