Over the past five years there has been a huge surge of development in Macau, leading them to overtake Las Vegas as the world’s No. 1 gambling market. Once a seedy sideshow to nearby Hong Kong, Macau now draws millions of Mainland Chinese visitors, who can’t legally bet at home. There are over 3 billion people in a travel radius around Macau. Because of this huge shift, Macau has been the center of attention for many investors looking to profit off its growing popularity. Stocks on Wall Street has been one of these interested investors and back on May 28th, 2010 we wrote our first article about the investment opportunities in Macau:
What we concluded was that we thought both the Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN) were well poised to begin new, major advances. Since then, both stocks have performed exceptionally well as LVS is up 92.29% and the WYNN up 37.65%. Below is our analysis on each stock and our future projections along with our current recommendations for each stock.
Las Vegas Sands (NYSE: LVS) Undervalued, Strong Long-Term Buy
We have been a huge fan of Las Vegas Sands for some time now. While some consider the company’s earnings to be expensive at 26.2x past earnings, we think it’s still a strong play and one that will appreciate significantly once the bears are proven wrong over Asian growth. Since we first invested in LVS back on May 28th, 2010 the stock has been a big winner, appreciating over 92%. Much of this growth came in the first year of trading, leading us to take profits at different intervals, in essence playing with the houses money. Nevertheless we still hold a sizable position and look to build on it as we think the stock is undervalued and poised for strong long-term growth. The past year has been a bumpy ride for LVS as shares have been all over the place, going up then down then back up, ultimately though making little progress. In the past year the stock has appreciated +9.35%, Year-to-Date +1.35%, past 6-Months -20.13%, and the past 3-Months +15.85% so you can see what we mean in all over the place. Nevertheless, as their new casinos begin operating we believe growth prospects will soar based on the fact that the market’s tendency to think in terms of “what have you done for me recently?”
As you can see in the chart below, analysts across the board are becoming more bullish about LVS’s prospects with over 86% of analysts covering LVS issuing a rating of ‘BUY’ or ‘STRONG BUY’ up from 80% just three months ago.
We are particularly optimistic about LVS’s outlook relative to their competition and we expect LVS to generate the greatest earnings growth in Macau. We are equally optimistic about the company’s endeavors in other emerging markets. Rumors are that LVS is in talks with banks right now to get financing to develop a resort in Spain.
So What to Expect?
In the short-term, the bears may bet the stock down due to their capex woes; however in the long run it will pay off significantly from a growing consumerist population abroad. If China’s Golden Week sales growth of 15% is any indication, the company can perform well even on off days.
With around 85% of their business leveraged towards Asian gaming, it stands to gain big from the current stimulus programs being implemented in China. One of the strongest economies in the world is Singapore and currently they have two major casinos, one that is run by LVS. We expect the company to increase their dividend yield (Current: 2.20%) and issue a share repurchase program to encourage investors to sit through the high capex periods and take a confident outlook on the future.
Wynn Resorts (NASDAQ: WYNN) Expensive, HOLD/SELL
While the Wynn Resorts has performed nothing like its competitor Las Vegas Sands, it still has been a solid investment up 37.65% since we originally invested back on May 28th, 2010. Wynn Resorts is an excellent casino operator, but overall they’re less attractive than their competition. A fair comparison, is valuing the WYNN against our other favorite, LVS. The two stocks represent a very close comparable peer due to their similar revenue exposure to the Asian markets and firm size however the WYNN’s valuations are again not favorable and don’t stack up to LVS. The WYNN underperforms LVS in growth potential, balance sheet measures, leverage, and profitability margins not to mention many other key indicators. The only advantage they have is a better capital return and free cash flow generation.
The WYNN’s free cash flow is one of the company’s strongest points as they have dramatically turned things around over the course of the past five years. In 2007, , they were in the red hundreds of millions of dollars and are now proudly in the positive over $2.1 billion. Nevertheless, the stock trades at 7.4% valuation premium to LVS’ two trading multiples and has a higher PEG Ratio of 2.03 vs. 1.00. Compared to its own financial conditions just a year ago, the WYNN’s growth estimates have substantially dropped. Adding to this, when you value their stock relative to the company’s fundamentals they again miss the mark. As a result, many analysts have issued a ‘HOLD’ rating for the WYNN as over 37% have a ‘HOLD’ or ‘SELL’ rating versus 62% issuing a ‘BUY’ rating or higher. Look at the chart below for more details:
The overvaluation wouldn’t be so bad if the company hadn’t performed so poor as of late. Looking at the past five quarters, management has missed expectations four times by an average of 4.9%. That’s not a good sign for investors. Much like LVS, the stock has had its ups and downs over the past year, performed relatively dismal despite for the recent surge the past three months. Looking at the overall performance of the course of the past year the stock has dropped -4.35%, Year-to-Date +1.35%, past 6-Months -7.85%, and then the surge over the past 3-Months +21.55%.
Bottom line, due to the lack of a sufficient margin of safety on this investment, we don’t recommend investing in the WYNN. For current investors either take this 21.55% surge over the past three months as an opportunity to cash out or hold onto the stock as if there is one bright spot, the firm’s Cotai resort development may generate positives in the near future.
Las Vegas Sands (NYSE: LVS): Undervalued, BUY
Analysis: Shares might dip in the short-term however we see LVS as a strong long-term play.
12-Month Price Target: $65, Yield of 31% + 2.20% Dividend
Total Net Yield: +33%
Wynn Resorts (NASDAQ: WYNN): Expensive, HOLD/SELL
Analysis: Sell shares on a strong day or hold with hopes new casino developments will improve growth prospects.
12-Month Price Target: $115, Yield of 11% + 1.70% Dividend
Total Net Yield: +13%