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TheStreet Open House

Viva Lost Wages: 8 Casino Stocks That Are on a Roll

BOSTON ( TheStreet) -- Casino stocks are looking like a good bet for investors this year if the U.S. economy continues its recovery at the same pace and Asian big spenders keep rolling the dice.

"The casino and gaming business may be poised for a high-rolling 2012, thanks to signals both domestically and abroad that may bode well long term for the sub-industry," in particular, Asia's gambling appetite, said S&P Capital IQ, in a research note.

The Standard & Poor's composite casinos and gaming index is up 12% this year, versus the S&P 500's 10% gain.

Most big casino companies are diversified, with hotel and resort components to go along with their various betting games. And, increasingly, they've come to rely on Asia, and in particularly Chinese bettors to fuel most of their growth, which is why they've been building new resorts there.

"The Chinese gambling market, which is limited to the tiny region of Macau, grew over 32% annually in the last five years, driven by a steady increase in China consumer spending and the ascent of tens of millions of consumers into the middle and upper classes," writes Morningstar casino industry analyst Chad Mollman. "We do not expect a major slowdown in growth, as market penetration for gaming in China is low relative to more developed markets, and as discretionary spending is less than 8% of income in China, compared to approximately 15% in the U.S. In addition, we expect major infrastructure investments to provide a growth tailwind. We currently project that the Macau gaming market will grow at an 18% (compound annual growth rate) the next five years."

Macau's gaming revenues rose 42% in 2011, according to its own government's statistics. It is now estimated to be a $23 billion business.

Standard & Poor's said that "despite fears of a hard landing in China, we think Macau gaming revenue growth will stay healthy in 2012. In February, Macau gaming revenue jumped over 22% on a difficult comparison (with the prior year)."

Esther Kwon, an S&P Capital IQ equity analyst, reported that the professional-services firm PricewaterhouseCoopers said that "Macau is set to become the world's biggest gaming market in 2013 and it expects Macau to almost double its revenues over the next five years, accounting for about a third of total global casino earnings."

Two companies perhaps best positioned to take advantage of that growth are Wynn Resorts (WYNN) and Las Vegas Sands (LVS).

Morningstar's Mollman says Wynn "has positioned itself as the premier luxury brand in the casino market in China, providing the company with the highest-spending gamblers and resort customers, who pay the highest room rates and bet the most per hand in the industry."

While Las Vegas Sands has a different approach. "It possesses one of only two casino licenses in Singapore and one of six licenses in China," says Morningstar's Mollman. "The company is focused on mass market customers in Asia, a market that has higher margins, lower volatility in results, and better growth prospects than the VIP (high-roller) market."

Domestically, the industry continues to grow as more and more cash-strapped states are turning to gambling to make up for their lost revenue since the recession. S&P says "the legalization or development of new U.S. gaming markets has accelerated with the debut of gaming facilities in states such as Pennsylvania, and state budgetary shortfalls. Casino gambling is now legal in more than 20 states, and we see a trend toward gaming machines being increasingly allowed at U.S. racetracks and other venues," which usually leads to other casino games.

Penn National Gaming (PENN) kicked off earnings season for the sector in fine form on Thursday, reporting that earnings jumped 53% year-over-year in the first quarter on a 10% rise in revenue.

Here are eight casino gambling companies' stocks in inverse order of the combined number of analysts' "buy" and "buy/hold" ratings, per S&P:

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