Gambling and Casino Stocks May Be Overvalued for 2014

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2013 has been a good year for casino stocks, with shares in the five most heavily traded companies up between 50% and more than 100%. That success has been driven by continuing growth in Asia and a come bet on online gaming in the United States.

The rising stock prices have encouraged investors to buy, and multiples have risen to high levels while analysts’ price targets are easily within range of being reached very quickly. Here is our look at the major players.

MGM Resorts International (NYSE: MGM) is the most heavily traded of the casino stocks, with more than 8 million shares changing hands each day. Its shares are up about 98% in the past 12 months, but the stock’s forward multiple of nearly 90 indicates that the firm’s expected performance in 2014 is based on a continued turnaround that may or may not occur. Tracinda, the private equity firm headed by Kirk Kerkorian, is the largest single largest shareholder in MGM, with an 18.6% stake, and any moves Tracinda makes will have a large ripple effect on the share price. We do not think it is a good bet for us to include MGM in our review.

Las Vegas Sands Corp. (NYSE: LVS) is up about 65% in the past 12 months. The stock has doubled since the beginning of August, and the company’s debt was upgraded to investment grade on Wednesday by Standard & Poor’s. The stock closed at $74.51 Wednesday, and the consensus analyst price target of around $77.90 implies a potential upside of about 4.5%. Shares have traded in a range of $42.67 to $75.56 over the past year. With a fiscal year 2014 earnings per share estimate of $3.62, it is valued at more than 20 times next year’s expected earnings.

Wynn Resorts Ltd. (NASDAQ: WYNN) is up about 54% in the past 12 months. Wynn upped its market share in Macau to 11% in November, and gambling revenue on the island rose nearly 19% year over year. Macau is clearly the place to be. The stock closed at $167.78 on Wednesday, and the consensus analyst price target of around $178.30 implies a potential upside of about 6.2%. Shares have traded in a range of $108.92 to $173.38 over the past year. With a fiscal 2014 earnings per share estimate of $7.23, it is valued at more than 23 times next year’s expected earnings.

Melco Crown Entertainment Ltd. (NASDAQ: MPEL) is up more than 150% in the past 12 months. Hong Kong-based Melco Crown, like Wynn, raised its share of Macau’s take from 13% to 14% in November. The stock closed at $36.44, and the consensus analyst price target of around $40.10 implies a potential upside of about 10%. Shares have traded in a range of $14.41 to $37.00 over the past year. With a fiscal 2014 earnings per share estimate of $1.58, it is valued at 23 times next year’s expected earnings.

Caesars Entertainment Corp. (NASDAQ: CZR) is up more than 210% in the past 12 months. Caesars sold its Macau property in August after trying for years and failing to obtain a gambling license. The company’s ownership of the World Series of Poker brand is considered to be its greatest strength, and that could be an enormous bonus if the federal government ever enacts a nationwide online gambling law. The stock closed at $19.80 Wednesday, and the consensus analyst price target of around $13.40 implies that the stock is overbought and could be headed for a fall. Shares have traded in a range of $6.27 to $26.57 over the past year. With a fiscal 2014 earnings per share loss estimate of $5.23, Caesars looks to reduce its 2013 projected loss of $11.02 by more than 50%.

One last possible play on casino stocks is online game developer International Game Technology (NYSE: IGT). Like other companies that once made slot machines and other devices, IGT has put a stake in the online ground with its purchase of Double Down Interactive. IGT shares closed at $17.78 on Wednesday, and the consensus analyst target price of around $18.80 implies a potential upside of just 5.7%. Shares have traded in a range of $13.58 to $21.10 in the past 12 months. Fiscal 2014 earnings per share are currently estimated at $1.42, indicating that the stock is valued at about 12.5 expected earnings.

The good news for the world of casinos and gambling is that you can still find some upside predictions for the next 12 months. The bad news is that valuations seem very high. With the casino business being a super-cyclical sector, we probably only would be comfortable evaluating the bulk of these companies if they have substantial pullbacks that are not macroeconomic-based. Trying to catch gains of 10% or 15% or less after exponential rises in casinos just sounds like a good way for investors to roll snake eyes.

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