Following the 2008 financial meltdown many high end resorts suffered, and those Las Vegas weren’t any different. Since then, however, leading gaming companies such as Caesars Entertainment Corp (NASDAQ:CZR) and Las Vegas Sands Corp. (NYSE:LVS) have slowly recovered. Are these companies out of the woods? Is it time to bet on Vegas again?
Since the beginning of 2013, shares of Caesars Entertainment Corp (NASDAQ:CZR) spiked by more than 113%. Shares of other leading gaming companies also sharply increased during 2013; shares of Wynn Resorts, Limited (NASDAQ:WYNN) rose by more than 23%, while Las Vegas Sands Corp. (NYSE:LVS)’ stock price increased by 27%. Based on these developments, investors are certainly showing their confidence by betting on gaming companies. But investors should be aware of the perils these companies face.
Debt is growing
In order to finance these companies’ high capital expenditures, their debt continues to rise: Wynn Resorts, Limited (NASDAQ:WYNN)’ total debt grew by 5% during 2012. Caesars Entertainment Corp (NASDAQ:CZR)’s debt grew by nearly 7% in the first quarter of 2013 (year-over-year); at the same time, its capital expenditure more than doubled in 2012 compared with 2011. The debt-to-equity ratio of Las Vegas Sands Corp. (NYSE:LVS) grew from 1.1 in the first quarter of 2012 to 1.3 in the first quarter of 2013. Despite the rise in debt, these companies are showing signs of recovery as several of the above-mentioned companies’ revenue grew in recent quarters.
Will revenue rise further?
In the first quarter of 2013, the revenue of Wynn Resorts, Limited (NASDAQ:WYNN) and Las Vegas Sands Corp. (NYSE:LVS) rose by 5% and 19.5%, respectively. Conversely, Caesars Entertainment Corp (NASDAQ:CZR)’s revenue slightly declined by 3%. Wynn Resorts and Las Vegas Sands, unlike Caesars Entertainment, also have a strong hold in Macao that accounts for nearly 60% of revenue for Las Vegas Sands and 75% for Wynn Resorts.
In recent years, gaming in Macao continues to be a great source of revenue growth for these companies and is likely to keep pulling up their income and profit margins in the coming years. Caesars Entertainment Corp (NASDAQ:CZR)’s Las Vegas Sands Corp. (NYSE:LVS) operations account for only 35% of its total revenue. Caesars’ other revenue is mainly from other areas in the U.S., such as Atlantic City, N.J., Louisiana and Mississippi. Therefore, investing in these companies means 25% to 40% exposure to Las Vegas.
Furthermore, a close examination of Las Vegas Sands’ financial report reveals that most of the growth in revenue was due to its new Sands Cotai Central hotel that opened last year. Revenue from other casinos and resorts in Macau actually fell during the quarter. On the other hand, revenue from its Las Vegas Sands Corp. (NYSE:LVS) property rose by roughly 7% (year-over-year).
Wynn’s revenue increased by 6.6% from its Vegas operations in the first quarter of 2013; its Macau revenue grew by only 4.4%. Both companies continue to have high profit margins of around 25% as indicated in the table below.
Caesars Entertainment’s profitability remains low at 1.5%. The company is trying to recover by expanding its operations off and on the strip: It plans to spend nearly $1 billion in 2013 on capital expenditures. These funds will be allocated to remodel Imperial Palace; off the strip it will invest in other casinos and joint ventures in Ohio and Baltimore. In the meantime, its Las Vegas Sands Corp. (NYSE:LVS) revenue fell by 2.6% in the first quarter of 2013. Moreover, nearly 50% of its operating profit was attributed to its Las Vegas operations.
Out of Vegas, Caesars Entertainment Corp (NASDAQ:CZR)’s revenue tumbled down in Atlantic City, N.J. by 15.5% (year-over-year). So Caesars’ Las Vegas Sands Corp. (NYSE:LVS) operations are still very important; its Vegas revenue might start to pick up in the coming months, especially with the recent renovations of Imperial Palace to The Quad.
The Foolish bottom line
Betting on gaming companies might be an interesting investment, but I think it’s still premature to determine if these companies are on their way to recovery. Wynn Resorts, Limited (NASDAQ:WYNN) and Las Vegas Sands Corp. (NYSE:LVS) are mostly exposed to Macau. Caesars Entertainment Corp (NASDAQ:CZR) is mostly exposed to the U.S. This may partly explain the difference between the profit margins of these companies. If the global economy slowly rises, all of these companies will reflect that in their bottom lines. Nonetheless, the high debt of these companies will keep their financial risk high.
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Betting on Las Vegas – Is This the Right Play? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
