Gaming Stocks Are Starting to Look Cheap
Gaming stocks have been surprisingly immune to the market downturn of the last few months. They've held their own as concerns about Europe, the U.S. debt downgrade, and a slowing economy pummeled the market.
But this week gaming stocks have had their own troubles. Over the last week Wynn Resorts (NAS: WYNN) is down 9.7%, Las Vegas Sands (NYS: LVS) is down 7.8%, Melco Crown (NAS: MPEL) has fallen 7.1%, and MGM Resorts (NYS: MGM) is down 3.4%.
Concerns about slowing growth in China have hit gaming stocks especially hard because these companies rely on Asia for a large part of their profit and growth.
As gaming growth has exploded in Macau, companies with casinos there have benefited from the added play. But growth in Macau has been so tremendous we need to put "slower growth" into perspective. Gaming growth has steadily climbed this year and peaked in August, with 57% growth over 2010. So slower growth is bad, but we're still talking about a ridiculously high level of growth if that number falls to 20% or 30%.
Growth has recently been spread between existing and new casinos; but once Las Vegas Sands' Cotai Central is built there will be very little expansion in capacity over the next few years. So any growth that does happen will likely occur in existing casinos.
The recent fall in stock prices has given investors an opportunity to pick up these stocks at much more reasonable levels. Melco Crown now has an Enterprise Value/Property EBITDA of 10.1, Las Vegas Sands is at 12.2, and Wynn Resorts trades at 11.5.
Last time I ran EV/Property EBITDA numbers for these operators in late August, every single one had a ratio above 12, so value is starting to creep into the picture. So what should investors do now?
The trade I'm considering: Melco Crown is currently the cheapest of these companies based on EV/Property EBITDA and provides a nice opportunity for investors. I'm looking at selling November puts with an $8 strike that are currently trading at $0.65. If they're exercised, I get shares for $7.35, if not I walk away with $0.65 per share in cash.
To keep up with gaming stocks add your favorites to My Watchlist, and My Watchlist will find all of our Foolish analysis on these stocks.
- Add Wynn Resorts to My Watchlist.
- Add Melco Crown Entertainment to My Watchlist.
- Add MGM Resorts International to My Watchlist.
- Add Las Vegas Sands to My Watchlist.
At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned, yet. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.