Editor's note: "Bricks and Mortar" is a mock portfolio created by reporter Nicholas Yulico that is meant to help generate real estate and gaming-related stock ideas. In keeping with TSC's editorial policy, Yulico doesn't own or short individual stocks.The fourth quarter started off with a bang for the broader stock market on Monday, and the Bricks and Mortar mock portfolio surged on the rally. The portfolio is now up 23.2% since its inception in late January, handily beating the S&P 500's return of 8.3% in the same period. Such outsized returns make it a nice time to examine what's working and whether there are still stocks left to buy in the real estate and casino sectors. From a top-down sector perspective, I believe homebuilder stocks will remain a disaster and should not be bought. I've been bearish on the group for a year now and continue to flag Ryland ( RYL) as overvalued. There's no reason to buy into a group where nearly all builders are reporting losses, and the future will get uglier because of pricing wars across the industry -- a thesis I laid out in a
Melco (Own)The strong opening of Las Vegas Sands' ( LVS) Venetian Macau in August has investors very excited about Macau, the only region of China where gambling is legal. Melco PBL, a Macau casino developer, has enjoyed some of this spillover love, with shares surging in recent weeks. This week, Melco shares have jumped 14.6% to $18.92. Melco also recently got a small vote of confidence from JPMorgan analyst Harry Curtis, who has been one of the major bears on the stock. Curtis says Melco should be able to meet, if not beat, his 2008 earnings estimates for the company. This is mostly because Melco is reducing its focus on the mass market to concentrate on growing the VIP segment at Crown Macau, its first casino, he said. The Crown is the only one of Melco's casinos open today. Therefore, for valuation purposes you need to look at earnings before interest, taxes, depreciation and amortization for 2010, because that is when all three of the company's three casinos will be open. The consensus 2010 EBITDA forecast for Melco is $775 million. To value Melco, I use a 12% discount rate, and discount that 2010 EBITDA back two years, to late 2008. Assume a multiple of 15 times EBITDA, and the stock deserves an enterprise value of $9.27 billion. Subtract the $900 million of the net debt that analysts project for 2010, and the stock is worth $21 a share today by my estimates. Quite frankly, I don't know what multiple Melco should trade at. But 15 times EBITDA looks reasonable in comparison to fellow Macau player Wynn Resorts ( WYNN), which trades at 23 times estimated 2010 EBITDA (assuming a 10% annual discount rate).
Starwood (Own)A U.S. recession, which some economists fear is looming, would no doubt be bad news for the hotel industry. Nonetheless, Starwood's strong international brand expansion opportunities remain compelling. If the company can achieve revenue growth of 7% per year, and margins continue to expand from pricing power, then I calculate the stock is worth around $70 using a discounted cash flow model. Taking into account share buybacks or takeover premiums could lift that price target further. Blackstone Group's ( BX) agreement to acquire rival Hilton ( HLT) spurred hopes of a Starwood buyout, but the takeout premium has since left the stock because of credit-market worries. But at around $62, the stock is very attractive.
Brookfield Properties (Own)At around $26, Brookfield currently trades at 15 times next year's funds from operations per share, a proxy for commercial real estate cash flow. Analysts project the office-building owner will record FFO of $1.67 per share in 2008. Given that analysts expect 6% annual earnings growth over the next five years, the stock is reasonably priced today and likely trades at a discount to the private market value of its real estate, much of which is located in the hot New York City market. Office rents remain strong across the country. Absent a substantial national recession, Brookfield's portfolio should continue to perform well.
Penn National and Hilton Hotels (Own)Both Penn National Gaming ( PENN) and Hilton have agreed to private-equity takeout deals. Hilton's deal is expected to close later this year, at which point I'll take the stock out of the mock portfolio.
Global Real Estate ETF (Own)Investors looking for commercial real estate exposure should head internationally, where growth remains strong. The Global Real Estate ETF ( RWX) remains the easiest way to play the market, since there are no pure-play international real estate stocks on U.S. exchanges.
Trump (Flag)I traveled to Atlantic City, where all of Trump's casinos are located, last weekend. The city had decent traffic at its casinos. But the market remains competitive, with every casino operator working hard to bring in customers from Pennsylvania and New York, which both introduced slots facilities over the past year. Atlantic City has suffered from declining gambling revenue this year because of lost customers. Of Trump's casinos, Trump Plaza should eventually benefit from its location near the Caesar's Pier, which is a great shopping and dining destination owned by luxury mall developer Taubman Centers ( TCO). But at the end of the day, I'm still not sure how Trump Plaza and Trump Taj Mahal can compete with the Borgata, a luxury casino owned by MGM Mirage ( MGM) and Boyd Gaming ( BYD) that is truly the nicest destination in the city. Until there are signs of a recovery on the horizon, Trump shares should stay stuck between $6 and $8, making it a poor investment unless you are an expert at market timing.
Ryland (Flag)As I noted in a
Home Solutions of America (Flag)I've flagged Home Solutions because of a big lack of visibility about the future. The construction management firm did hold a conference call last week to provide updates on its projects, but it didn't include much new information. Management said it is in the process of expanding its credit facility from $60 million to $125 million. However, the present credit line
|Bricks and Mortar Portfolio |
A Look at How Nicholas Yulico's Picks Have Performed
|Rating Date||Price at Rating||Rating||Current Price*||Return**|
|Brookfield Properties (BPO)||1/23/2007||$28.67||Own||26.18||-8.7%|
|Global Real Estate ETF (RWX)||1/23/2007||$64||Own||64.49||0.6%|
|Penn National (PENN)||2/6/2007||$45.56||Own||59.10||29.7%|
|Melco PBL (MPEL)||3/12/2007||$15.46||Own||18.92||22.4%|
|Home Solutions of America (HSOA)||4/24/2007||$4.98||Flag||3.56||28.5%|
|Starwood Hotels (HOT)||7/12/2007||$72.37||Own||62.10||-14.2%|
|Average Total Return, Unweighted||23.2%|
|Close At Start of Portfolio||Current Value|
|U.S. MSCI REIT Index||1140.36||1,053.13||-7.6%|
|*(10/2/07 closing prices) |
**For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.