Gaming’s Big Macau Players Are a Gamble

When it comes to casino stocks, investors have not always had Lady Luck on
their side even in the red-hot gaming market of Macau. Shares of Wynn Resorts
(NASDAQ: WYNN ) have soared more than 46% this year because its operations in
Macau are growing like gangbusters. The Macau magic, however, has not rubbed off
on Las Vegas Sands (NYSE: LVS ), which has barely budged this year amid
investors' concerns about lawsuits alleging illegal activities in Macau ,
which the firm has denied. MGM Resorts (NYSE: MGM ), which recently took control
of its Macau joint venture, has been hurt by concerns about its lackluster
earnings. Its shares have slumped nearly 30%. None of these stocks are a
compelling value even though Macau gaming revenue was a record $3.1 billion in
August , an increase of 57% year-over-year. Wynn Resorts whose Macau property
features a 222,000-square-foot casino, 600 luxury rooms and suites along with
46,000 square feet of retail space trades at a multiple of more than 50, well
above the average P/E of the S&P 500, which is about 16. Wall Street analysts
have an average target price of $150 on the stock, which about where it trades
now. Las Vegas Sands, which owns three properties in Macau and one in Singapore,
might have more upside potential than Wynn Resorts. Analysts have an average
price target of $53.50 on the stock, above the $45.01 where it traded recently.
It has a more reasonable multiple of 38. Sands China Ltd., a subsidiary of Las
Vegas Sands, reported $1.21 billion in quarterly revenue , up 16.3% from 2010.
Net income rose 100.1% to $267.4 million. Adjusted property EBITDA for Sands
China Ltd. increased 27.1% to $382.1 million. Second-quarter net revenues at
Wynn Macau were $976.5 million , a 36.7% increase over 2010. Adjusted property
EBITDA rose 45.4% to $314.3 million. Future success in Macau is far from
certain. Concerns about China's economy overheating appear to be justified .
Moreover, Wynn and Las Vegas Sands face formidable local competitors in Macau
such as Melco Crown Entertainment (NASDAQ: MPEL ) and Asia Entertainment &
Resources (NASDAQ: AERL ). But the American firms have an ace up their sleeves
that the Chinese firms don't Las Vegas. Wynn CEO Stephen Wynn bragged on his
company's recent earnings conference call that in early July, Wynn's
operations in Sin City equaled their performance in 2010 , "so for the balance
of the year, everything from here on in, in Las Vegas is improvement. His
counterpart at Las Vegas Sands, Sheldon Adelson, touted the 41% gain in adjusted
EBIDTA at his Vegas properties because of an increase in conventions and the
"improving Las Vegas environment." Indeed, the Las Vegas Strip went jokers
wild in May and June, posting gains of 28.93% and 32.31% , respectively, boosted
by increased revenue from table gains. "Definitely, we had two good months,"
says Dr.