If the macroeconomy is starting to look brighter, it makes sense to invest in companies that are geared towards making life, well, more fun. If consumers have more money to spend and are feeling more optimistic about the future, demand for leisure, or luxurious goods, will increase. In my view, the toy and casino industries stand to benefit from an improving macro environment. Below, I review two key stocks that I am optimistic about within these categories.
As I suspected, Macau proved to not be nearly as big of a negative catalyst as analysts made out. Tailwinds from Macau actually drove gambling revenues up by 7.9% in November. Currently, it continues to be one of the best markets in the world with consistent sequential growth. Macau revenues went up by 19% in 3Q12, a 14% increase from the same period a year earlier. In 4Q12, the market share went up by 35%, and the win ratio was a reported 20%. LVS is now reportedly outperforming the market. It should thus not be surprising that the stock has risen 37% over the last six months.
The table business in Macau has seen its win per table rise in defiance of all of the talk about instability in Macau, especially in connection to the government change. In 2Q12, LVS even doubled down on its Macau bet by expanding with two more casinos and the addition of 3,500 hotel rooms plus 2,000 more in 1Q13. They are currently constructing Parisian Macau, which should open by the end of 2015.
It’s one thing to have growth; it’s an entirely different thing to have value creating growth. As the famous McKinsey book on corporate valuation can tell you, growth that does not drive a return on invested capital above the weighted average cost of capital kills value. When management loses a vested interest in the company, it tends to become more interested in empire building. By contrast, LVS’s Chairman & CEO Sheldon Adelson has a large equity stake in the company and remains committed to creating value. His focus is therefore on only investing in projects that will give a ROI of at least 20%.
Toy Time? Why You Should Buy Mattel, Inc. (NASDAQ:MAT)
The famous Barbie maker has seen its shares rise relentlessly since it was listed on the NASDAQ. It is now up 27.9% over the last 12 months and continues to deliver terrific operating performance. In the fourth quarter, international sales rose 4% and margins expanded by 290 bps. Monster High and American Girl brands rose by double-digits, 55% and 13%, respectively. This execution is reinforced by the company’s commitment to returning free cash flow to shareholders in the process. The firm recently increased its dividend by 16% to a yield of 3.8%.
Mattel’s brands are quite resistant to macro challenges, which is evident by how they experienced better recent results than peer companies in the recent quarter. Despite sales erosion for Barbie in 4Q12, innovation, as highlighted above, continues to drive the company’s bottom line. This keeps me optimistic that the firm will be able to outperform the broader market. While it will be easily able to track economic growth, it can create value on top of that through leveraging its powerful brand in the introduction of new toys. The new aggression towards securing new licensing rights to the top production studios for their toys, including The Walt Disney Company (NYSE:DIS) and Pixar, represents, for example, a step in the right direction. Meanwhile, market share continues to rise in North America and Europe.
