Competition from online casinos continues to be a factor for these big players. However, there is good news for large brick and mortar operators. The problem with many online sites is that, as a whole, they have been tainted by criminal activity and shady operations. Most recently, seven Dutch online casinos were shut down due to allegations of money laundering.
So which game to play?
So should investors place their bets – and if so, on who? Casino stocks do have some degree of predictability. However, net income growth rates are extremely inconsistent, are heavily dependent on the economy, and are also affected by unpredictable gaming revenues (or losses). Weather can be a factor, and so can business travel and leisure travel trends.
The first thing to consider is that almost all casinos are hotels first and foremost. This means that the stocks often behave like hotel stocks do; namely, they will possibly perform poorly when the economy contracts. In those cycles, hotel REITs will be selling property. Shorting these (hotels and casinos) is a good bet. Likewise, it is wise to get in at the bottom, when the economy begins to expand.
Another consideration is that when the economy is expanding, gaming revenue can be unpredictable, but as a rule, it will grow as well. This is largely because people have more dispensable income for ‘fun.’ Analysts might be able to peg revenue and growth quarter to quarter, but establishing a growth rate, PEG ratio, or other valuation metric is difficult. This does not mean investors should ignore it, merely consider it in a total strategy.
Due to their cyclical nature, casino stocks are trading stocks and are more difficult to buy and hold. Currently, the American economy is on the upswing. Hotel average daily rates, occupancy rates, and revenue per available room are all rising strongly. Thus, casino and leisure stocks will rise as well.
While growth continues in casino and gaming availability, as mentioned in Macau, MGM Resorts International (NYSE:MGM)’s expansion on the strip, and Wynn Resorts, Limited (NASDAQ:WYNN)’s planned $4 billion resort on the Cotai Strip, revenue will likely increase as well. All of these factors make considering Wynn Resorts, Limited (NASDAQ:WYNN), Las Vegas Sands Corp. (NYSE:LVS), and MGM a good bet.
The article The House Always Wins: Can Casino Stocks Follow Suit? originally appeared on Fool.com and is written by Bill Edson.
Bill Edson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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