Wynn Palace in Macau could make Wynn Resorts a great stock to buy and hold long-term. Image: Wynn Resorts.
It's been a bad year for most of the gaming industry, particularly those with exposure to Macau. Las Vegas Sands (LVS -8.66%) and Melco Crown (MLCO -2.66%) have plunged, but it's Wynn Resorts (WYNN -1.42%) that has taken the brunt of Macau's downfall, as you can see below.
Surprisingly, MGM Resorts (MGM 0.02%) is the star of the industry because it's primarily exposed to Las Vegas. So, what will be the best performer of the next year?
How expensive are gaming stocks?
One of the best ways to gauge the value in shares of gaming companies is to look at their cash flow (EBITDA is a proxy) compared to their enterprise value (market cap plus net debt). On that basis, MGM Resorts seems like the best value despite being the top performer on the stock market over the past year.
|
EBITDA (ttm) |
Market Cap |
Net Debt |
EV/EBITDA | |
|---|---|---|---|---|
|
Las Vegas Sands |
$4.47 billion |
$35.88 billion |
$7.27 billion |
9.7 |
|
MGM Resorts |
$2.47 billion |
$12.66 billion |
$11.16 billion |
9.6 |
|
Melco Crown |
$974.1 million |
$8.68 billion |
$1.20 billion |
10.1 |
|
Wynn Resort |
$1.25 billion |
$6.05 billion |
$6.72 billion |
10.2 |
Source: Company earnings releases and SEC filings.
These numbers lay the groundwork for determining value, but it doesn't say anything about how these companies could grow in the future.
New resorts will tell the real story
Each of these four companies are building a new resorts in Macau's Cotai region that may add to EBITDA long-term. Melco Crown's Studio City project is already open, Wynn Palace will open in June, and resorts from MGM and Las Vegas Sands are hoping to open by the end of next year.
The impact of each resort will be felt differently for each company. As the two biggest companies, Las Vegas Sands and MGM won't feel the impact of one additional Macau competitor as much as others simply because of their size. Las Vegas Sands may also see more cannibalization from the rush of new casinos on Cotai than competitors like Wynn and MGM, which are building there for the first time.
Melco Crown could see a big impact from Studio City if it weren't for the fact that the resort was allotted only 200 table games when it opened and will have just 250 in 2016. So, the impact of the resort will be muted.
Wynn Resorts has the biggest upside potential if given anywhere near the 500 table games Steve Wynn hopes for. The company has the smallest market cap and just two operational resorts, so adding another in the highly profitable Cotai region will have a big impact. Steve Wynn's resorts have historically generated more EBITDA than neighboring resorts, whether in Las Vegas or Macau. The resort should easily generate $650 million in EBITDA (Wynn Macau's third quarter run rate) and may generate over $1 billion in EBITDA (comparable to Venetian Macau).
Macau in general is an uncertainty, but its resorts still generate far more cash than resorts in Las Vegas, so expanding there is still the right thing to do. Now, we'll have to wait and see how big the impact is on operations.
The best stock depends on Macau
If the Macau market starts to grow again in 2016 and table games are allocated as gaming operators hope, it's clear that Wynn Resorts should outperform competitors on the stock market. Its new resort could nearly double the company's EBITDA each quarter by the end of next year. But Wynn has been hit harder than competitors because Macau has been in freefall and there's uncertainty about table game allocation. It's a high-risk stock with the potential for high reward.
MGM Resorts is the lower risk investment option that still has upside potential as Las Vegas grows and MGM Cotai gets closer to completion. If you're not willing to bet on the potential of Wynn Resorts, MGM is the top stock in gaming today, but my money is still on Wynn Resorts' expanding footprint and the potential Cotai provides.
