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
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
Las Vegas Sands
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
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:
Boyd, with a market value of $718 million, operates 16 casinos in Las Vegas, Atlantic City, Illinois, Indiana, Mississippi and Louisiana.
Its shares are up 8.7% this year and have a three-year, average annual return of 10%. Analysts give its shares one "buy" rating, two "buy/holds," 14 "holds," two "weak holds," and two "sells," according to a survey of analysts by S&P. Analysts estimate that it will earn 28 cents per share this year, and that that will grow to 42 cents next year.
Isle of Capri Casinos
Isle of Capri, with a market value of $258 million, operates 13 casinos in the U.S., from Mississippi to Kansas City, Mo., three casinos in the United Kingdom, and one in the Bahamas.
Its shares are up 39% this year, but have a three-year, average annual loss of 9%. Analysts give its shares five "buy" ratings, one "buy/hold," and six "holds," according to a survey of analysts by S&P.
Ameristar, with a market value of $628 million, owns and operates eight casinos in seven locations, from Chicago to Nevada. Each of its properties includes hotels, restaurants, bars, and casino gaming floors. Slot machines account for most of its revenue.
Its shares are up 7.3% this year and have a three-year, average annual return of 12%. Analysts give its shares eight "buy" ratings, and eight "holds," according to a survey of analysts by S&P. Analysts estimate it will earn $2.23 per share this year and $2.42 in year 2013, a 9% increase.
Penn National Gaming
Penn National, with a market value of $3.6 billion, is the second-largest operator of regional casinos in the U.S., with over $2.4 billion in revenue and over 20 properties in 14 states and Canada.
Its shares are up 17% this year and have a three-year, average annual return of 16%. Analysts give its shares six "buy" ratings, six "buy/holds," 10 "holds," and one "weak hold," according to a survey of analysts by S&P. Analysts estimate that it will earn $2.26 per share this year and $2.70 in 2012, which is 19% growth.
Wynn, with a market value of $13 billion, is an operator of luxury casinos and resorts, including: Wynn Macau and Encore in China, and Wynn Las Vegas and Encore on the Las Vegas Strip. Its first-quarter earnings are due April 25.
Its shares are up 17.7% this year and have a three-year, average annual return of 66%. Analysts give its shares seven "buy" ratings, eight "buy/holds," and 10 "holds," according to a survey of analysts by S&P. Analysts estimate it will earn $5.88 per share this year (after earning $1.39 per share last year) and $6.92 next year, which is 18% growth. S&P has it rated "buy," with a $131 price target, a 4% premium to the current price.
Morningstar says it "stands to benefit from an imbalance in demand and supply in the Chinese gambling market, with industry revenue projected to grow 12%-15% annually over the next five years and supply expected to grow only 5% per year, which will drive (earnings before interest, taxes, depreciation and amortization) and free cash flow higher, without significant investment."
Melco Crown Entertainment
Melco, with a market value of $2.5 billion, engages in the development, ownership, and operation of casino gaming and entertainment resort facilities in Macau.
Its shares are up 59% this year and have a three-year, average annual return of 50%. Analysts give its shares nine "buy" ratings, seven "buy/holds," and three "holds," according to a survey of analysts by S&P. Morningstar analyst Chad Mollman says it's the only U.S.-listed company focused exclusively on the Chinese casino industry. "We think Melco is well-positioned to grow even faster than the overall market."
MGM Resorts International
MGM, with a market value of $7 billion, is the largest gaming and hotel company on the Las Vegas Strip, with 30% of all guest rooms in the market. Its properties include: Bellagio, MGM Grand, Mandalay Bay, Mirage, Luxor, New York-New York, and a 50% ownership stake in CityCenter.
Its shares are up 32% this year and have a three-year, average annual return of 30%. Analysts give its shares 13 "buy" ratings, six "buy/holds," and 10 "holds," according to a survey of analysts by S&P.
Analysts expect it to lose 47 cents per share this year. S&P, which has its shares rated "hold," says: "We see continued momentum in Vegas against a backdrop of less than 0.5% room supply growth, but believe (its) shares already incorporate improvement."
Las Vegas Sands
Las Vegas Sands, with a market value of $45 billion, operates casinos in Las Vegas, Bethlehem, Pa., and Singapore and Macau, China.
Its shares are up 37% this year and have a three-year, average annual return of 127%. Analysts give its shares 15 "buy" ratings, 10 "buy/holds," and three "holds," according to a survey of analysts by S&P. S&P, which has it rated "buy," says that "with an estimated 57% of its revenue to be derived from Macau properties in 2012, coupled with opening of the first phase of Sands Cotai Central in April, we view (the company) as well-positioned in Macau. We also expect news about the potential legalization of gaming in new jurisdictions to boost the group."
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