Casino Stocks in 2014: Macau Is the Place to Be

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The Macau gambling authority said on Thursday that the island’s gambling revenue rose 19% year-over-year in 2013 to $45.2 billion, about seven times the revenue expected from gambling on the Las Vegas Strip. The bump in Macau’s revenues comes on top of a 14% increase in 2012.

Without question, the place for a casino operator to be is Macau, the only place in China that is allowed to offer casino gambling.

Las Vegas Sands Corp. (NYSE: LVS) is up about 62% in the past 12 months. The stock closed at $79.05 on Tuesday, and the consensus analyst price target of around $79.10 suggests that the stock is fully valued. But that target has risen more than $2.00 a share in just the past month, so expect more adjustments soon. Shares have traded in a range of $47.95 to $79.25 over the past year. With a fiscal year 2014 earnings per share (EPS) estimate of $3.64, it is valued at more than 21 times next year’s expected earnings.

Wynn Resorts Ltd. (NASDAQ: WYNN) is up about 64% in the past 12 months. Wynn upped its market share in Macau to 11% in November and this new report on gambling revenues in Macau is really encouraging for the shares. The stock closed at $195.56 on Tuesday, and the consensus analyst price target of around $182.40 indicates that the stock is overbought. Shares have traded in a range of $113.39 to $196.44, and the high was set Thursday morning. With a fiscal year 2014 EPS estimate of $7.27, it is valued at more than 26 times next year’s expected earnings.

Melco Crown Entertainment Ltd. (NASDAQ: MPEL) is up more than 125% 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 $39.22 Tuesday night, and the consensus analyst price target of around $41.75 implies a potential upside of about 6.5%. Shares have traded in a range of $17.32 to $39.42 over the past year and hit a new 52-week high Thursday morning of $40.20. With a fiscal year 2014 EPS estimate of $1.60, it is valued at 24.5 times next year’s expected earnings.

Caesars Entertainment Corp. (NASDAQ: CZR) is up more than 190% in the past 12 months. Caesars sold its Macau property in August after trying and failing for years to obtain a gambling license. The stock closed at $21.54 Tuesday night, and the consensus analyst price target of around $12.6 implies that the stock is overbought and could be headed for a fall. The price target has in fact fallen more than $1.00 since early December. Shares have traded in a range of $7.00 to $26.57 over the past year. With a fiscal year 2014 net loss estimate of $5.40 per share, Caesars still looks to reduce its 2013 projected loss of $11.01 by more than 50%.

MGM Resorts International (NYSE: MGM) is the most heavily traded of the casino stocks, with nearly 9 million shares changing hands each day. Its shares are up nearly 92% in the past 12 months, but the stock’s forward multiple of nearly 107 indicates that the firm’s expected performance in 2014 is based on a continued turnaround that may or may not occur. We do not include MGM in our review because such a large stake in the company — 18.6%– is owned by Tracinda Corp., the private equity firm headed by Kirk Kerkorian. MGM owns an operating subsidiary, MGM China Holdings Ltd., that is traded in Hong Kong.

Valuations are sky-high on the casinos, which means either that analysts are going to have to raise their price targets or that these stocks are once more going to be growth plays. Just looking at share price appreciation over the past year makes it likely that casino stocks, especially those with properties in Macau, are likely to continue being growth plays in 2014. It is hard to believe that they will match the numbers they put up in 2013, but gambling growth in Macau appears to be playing out on a no-limit table.

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