Operators of integrated casino, hotel and entertainment resorts seldom fail to build businesses as demand for casino services is relatively inelastic. This is because casinos attract a particular set of consumers, whose preferences remain more or less similar despite adverse market conditions.
In addition to this, the legalization of sports betting outside Nevada widened the scope for casino operators since illegal betting is valued at billions of dollars annually in the United States. Further, casino operators are collaborating with the hospitality sector, setting up luxury hotels and generating high-margin non-gaming revenues.
But it is not prudent to think that the industry has no hurdles to combat. An ongoing trade war between Washington and Beijing is continuously hurting casino stocks. Moreover, increased hotel openings and promotional activities made Las Vegas and Macao markets highly competitive. Thus, excess supply, especially in the Macao market, is a challenge for individual casino providers. Also, the industry is infested with high debt levels.
Amid such a backdrop, leading casino companies like Wynn Resorts WYNN, Penn National Gaming, Inc. PENN, Las Vegas Sands Corp. LVS and MGM Resorts International MGM are continuously devising strategies to drive revenues and profits. In response to a rapidly evolving and dynamic market, Las Vegas Sands and MGM Resorts are capitalizing on the significant profit associated with the business. The companies currently carry a Zacks Rank #3 (Hold) and have respective market capitalization of $45.8 billion and $14.9 billion.
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Price Performance and Earnings & Revenue Estimates
Arguably, earnings growth is of the utmost importance for determining a stock’s potential as surging profit levels indicate solid prospects (and stock price gains). For 2019, Las Vegas Sands’ earnings are expected to grow 9%. Moreover, it is expected to witness year-over-year sales growth of 2.2% in 2019. MGM Resorts’ 2019 earnings are likely to decline 2% while sales are likely to improve 10.9%.
In the past year, Las Vegas Sands’ shares have declined 21.9% while MGM Resorts’ shares lost 5.4%. Meanwhile, the industry recorded collective decline of 21.2%.
Since casino stocks are debt-laden, it makes sense to value those based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just its equity but also the level of debt on a company’s balance sheet. For capital-intensive companies, the EV/EBITDA is a better valuation metric because it is unaffected by changing capital structures and ignores effects of non-cash expenses on a company’s value. The trailing 12-month EV/EBITDA ratio of MGM Resorts is 10.14 while that of Las Vegas Sands is 10.33. With the industry average being 12.22x, MGM Resorts has an edge over Las Vegas Sands.
Since the sector has high financial leverage, the debt-to-asset ratio comes into the picture. Excessive reliance on debt financing is a concern for both companies. As of Mar 31, 2019, cash and cash equivalents were $1.2 billion, whereas long-term debt of $14.7 billion was much higher. For Las Vegas Sands, unrestricted cash balance was $4.13 billion as of Mar 31, 2019. Total debt outstanding, including the current portion and net of deferred financing costs, along with original issue discount, summed $11.98 billion.
By looking at debt-to-asset ratio, we can have a sense of a company’s ability to meet its long-term debt. Leisure stocks should ideally have lower debt ratios, which means there will be higher proportion of the company’s assets over the long term. Las Vegas Sands’ debt ratio is 53.8 compared with the industry’s 56.5 and MGM Resorts’ 47.3.
Return on Equity & Net Margin
Las Vegas Sands delivered a return on equity (ROE) of 34.5% in the trailing 12 months compared with 5.2% growth recorded by the industry. MGM Resorts’ ROE is 4%. This indicates that Las Vegas Sands reinvests more efficiently than MGM Resorts.
Traditionally, gross margin for the hospitality companies is comparatively higher as the majority of expenses come from the cost of operations. However, the sector’s profits are not very high, which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 2.2% while that of Las Vegas Sands and MGM Resorts’ is 11.2% and 2.3%, respectively.
While Las Vegas Sands’ projected earnings and margins are more promising than MGM Resorts’, the latter’s debt ratio is encouraging. Please take a look at the following table to compare the two gaming giants.
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MGM Resorts International (MGM) : Free Stock Analysis Report
Wynn Resorts, Limited (WYNN) : Free Stock Analysis Report
Las Vegas Sands Corp. (LVS) : Free Stock Analysis Report
Penn National Gaming, Inc. (PENN) : Free Stock Analysis Report
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