A key concern for many casino investors is slowing growth in Macau. However, this has proven to be a lot less of an issue than what the market originally expected. The subsequent market correction has sent casino shares soaring by the double-digits. New issues, however, have arisen for MGM that can ultimately bring similar returns if resolved in an appropriate manner. Below, I present my take on LVS and MGM.
Las Vegas Sands Corp. (NYSE:LVS): Risky but Full of Growth
Las Vegas Sands has now risen around 70% from the 52-week low–largely driven by Macau experiencing less deceleration than expected. In 3Q12, Macau gambling revenue rose 7.9% y-o-y as a result of greater popularity among the middle-class demographic. In fact, Macau’s third quarter 2012 gambling revenue went up by 19.3%, which actually marked acceleration. And even though the company’s fourth quarter EPS of $0.54 missed consensus by 5 cents, revenue was in-line, and the stock price still jumped 4.2% after hours.
The gaming win share was 20%+ in the month of October. Table revenue performance in Macau expanded by 26% y-o-y, and winnings per mass table rose to $8,700. The only real negative is that, in the fourth quarter, margins fell from a $240 million tax loss on the Marina Bay Sands. And now reports are coming out that Macau resorts are selling out ahead of the Chinese New Year, and Capital Securities is now saying that LVS will see its biggest surge from expansing to 40% of all rooms in the booming region. So much for those Macau concerns.
At the same time, the company has been aggressive in growth. After April 2012, the company added two casinos and over 3,600 hotel rooms. The Parisian Macau Building project is also waiting for the local government’s green light to proceed, but the plan is to open before 2016. Management is also only shooting for projects that can deliver ROIs north of 20%. Sheldon Adelson, the company’s billionaire CEO, is also the company’s largest shareholder, so he has a vested interest in constructive, value-creating growth.
MGM Resorts International (NYSE:MGM): A Downside Story but With Turnaround Potential
In contrast to LVS, MGM faces a “downside story.” For some time, I have characterized MGM as the “danger” pick of the casino operators. While it generates an incredible free cash flow yield of 10.2%, it is still in the red and lost $1.34 per share over the trailing twelve months. It is expected to lose $0.35 per share more next year. Perhaps most pressing, net debt stands at $11.3 billion, which eclipses the $6.3 billion market cap. It is for these reasons that Deutsche Bank recently downgraded the stock to a “hold.”
The company is also a defendant in a widely-covered lawsuit. The plaintiff, MGT Capital Investments Inc. (NYSEAMEX:MGT), has gone through considerable restructuring, cost-cutting, and management turnover to get to where it is today. This messy process has, in turn, substantially discounted the stock, which now has a compelling value story that consists of monetizing patents. In mid-2012, the company acquired patent rights to a gaming system that to, put it briefly, consists of linking two gaming machines together to a bonus game that, when triggered, allows the players to compete against one another.