Casinos set to recover

The game of chance, the dream of winning it big, and the urge to “let loose” keeps people flocking to casinos. Destinations like Las Vegas and Macau are the hottest gambling towns on the planet. The draw of entertainment and gambling, in both hotels and casinos, has helped these cities create a tourism economy, unlike anywhere in the else in the world.

2015 was a horrible year for casino stocks, with some sliding over 50% from their 52-week highs. A betting man would typically avoid this trend, taking his chances at the roulette table. However, an investor should be eyeballing the sector, now that WYNN has set the 2016 tone with its preliminary guidance.

The Casino Industry

Casinos have always been thought of recession proof, but 2008 changed that idea as many stocks were hit hard during the financial crisis. Expansion before the crisis, in both Vegas and Macau, caused many casinos to leverage up, loading balance sheets with debt. Many speculators shorted casinos in anticipation they would not be able to complete projects, or pay back their debt.  However, the industry came away largely unscathed, as the US economy came out of recession and Macau started to see large revenue growth.  

Macau

For those of us not in the loop, Macau is the Vegas version of China. It is an important revenue stream for publicly traded American companies such as Wynn Resorts (WYNN - Analyst Report), MGM Resorts (MGM - Analyst Report) and Las Vegas Sands (LVS - Analyst Report).  The two charts below from Statista.com tell us exactly that. The first chart is the number of people that went to U.S. casinos within the last twelve months, while the second chart shows global gaming revenue for the last nine years. If a US company wants to find growth, it will find it beyond our borders.

Macau actually overtook the Las Vegas strip in gaming revenue in 2007, which made it essential place to be for a casino looking for revenue growth. Macau had grown so fast, that in 2012 revenue was 10 times higher than Vegas.

However, these casinos rely on the VIP high-roller sector, which can account for over 70% of revenues for some Macau casinos. Many of these high rollers have been pushed away over the last couple years as the Chinese government has put controls on the industry. Government regulators have issued policies to crackdown on corruption in the casinos, where money laundering accusations have arisen.
 
Earlier this month Macau casino revenue came in at -21.2% year over year versus -32.3% prior. This was an ugly number and the nineteenth consecutive decline in Macau revenues. Overall, revenues were down 34% in 2015, a number that has justified the stock price decline in companies dealing in Macau.

Investors are well aware of the risks associated with Macau. Government interference and a slowing Chinese economy are nice excuses to stay away from these stocks for now, but the fears seem to be fully priced in.

WYNN Resorts guidance and price action afterwards, told us just that.

Wynn Resort’s guidance

Late last week, Wynn Resorts (WYNN - Analyst Report) guided Q4 revenues at $939-$962 Million versus the $962 Million expected.  Fiscal year 2015 revenues are now expected at $4.06-$4.08 Billion versus the $4.12 Billion expected.

Macau EBITDA will come in low, $156-$164 Million versus the $241.2 Million year over year. Macau revenue is now expected at $552-$560 Million versus the $761.2 Million expected.  The all important VIP turnover number is a negative 37% year over year.  Las Vegas revenue was actually up, now at $387-$395 Million versus the $376.8 Million year over year.

Price action and interpretation

It’s clear in the guidance that Macau is still struggling and will continue to do so in 2016, primarily due to the macro environment in China. The VIP segment has not come back and until they do there will be issues. However, the Vegas strip is doing fine, showing stability and some growth. The disparity gives us insight into the current market situation in China, versus the US.

The stock acted favorably, closing up over 13%, while the DOW was down almost 400 points. This kind of price action is noted by investors, as smart money seemed to flood into the stock on a very negative day. The thought may be that that the slowdown in Macau is becoming less intense, with a possibility of stabilizing in the next couple quarters. That with the stability of the Vegas Strip, has speculators taking a chance on Wynn at these prices.
 
WYNN Resorts (WYNN - Analyst Report) is a Zacks Rank #3 (Hold), up recently from a sell rating. This recent move tells us analysts were impressed with the guidance and feel like a bottom maybe in. Wynn is the place to be when Macau turns around, as the long-term growth prospects are significant. At the very least, it is worth watching to see how the next quarter develops.

However, Macau related stocks will undoubtedly remain volatile as it tries to find a bottom. Due to the current market atmosphere in China, investors might want to stay away from stocks with Macau exposure, at least until the numbers improve.  Those looking to take a gamble in the sector have three great domestic choices to play a casino bounce back.

Bet on these casino stocks

The gaming industry is ranked 30 out of 265, top 11% of industries. In this case we are looking for casino stocks with strong ratings, but specifically, no exposure to Macau.

Boyd Gaming (BYD - Snapshot Report) is a Zacks Rank #1 (Strong Buy), with “Style” score ratings, of B, in both Value and Growth. Boyd, headquartered in Las Vegas, operates 22 properties in eight states. The company has a market cap at about $2 Billion with a 17.42 P/E.

The chart below shows four straight quarters with an EPS surprise. Wynn showed the stability in Vegas, so there is reason to believe that Boyd will surprise on the positive side once again.

Caesars (CZR) is a Zacks Rank #1 (Strong Buy), with “Style” score ratings, of A in Value and B in Momentum. Caesars, based in Las Vegas, operates casino resorts on multiple continents, but has no major presence in Asia. Restructuring and bankruptcy proceedings have hurt the company’s prospects, but analysts see a possible turn around in the bottom line. The consensus estimate trend is rising, going from $5.05 60 days ago to $3.01 for current fiscal year estimates. Next year’s estimates are also on the rise, going from $-0.44 to -$0.16.

Isle of Capri (ISLE - Snapshot Report) is a Zacks Rank #1 (Strong Buy), with “Style” score ratings, of A, in both Value and Growth. Isle is St. Louis based company that operates gaming, lodging and entertainment facilities inside the United States. They sport a forward P/E of 8.75 with a $500 Million market cap, creating a value opportunity and a possible takeover candidate. The consensus estimate trend is rising, going from $1.25 60 days ago, to $1.45 for the current fiscal year. Newly named CEO, Eric Hausler, should be in a good position when he takes over the company in April 27, as estimates are rising for next fiscal year as well, from $1.31 to 1.56.

In summary

Collectively, the casino sector has been dragged down due to the poor performance in Macau. The momentum has led to selling pressure in these three domestic companies, creating a long-term value opportunity. When Macau does get a bounce back, we will see the casino sector bid up; creating an environment that will be eventually be overvalued. This is exactly when the investor would take his chips off the table and move on to the next game.