OK. It’s time to break out the clichés.
What goes up must come down.
Trees do not grow to the sky.
All gaps close.
And our favorite, attributed to everyone from John D. Rockefeller to J. P. Morgan: Stocks fluctuate.
What is prompting this reach for investor aphorisms is the sudden collapse of the recent Wall Street and Hong Kong darlings, Macau casino stocks.
As of this writing, and in just two short weeks, Las Vegas Sands has fallen 14 percent and Wynn 16.5 percent.
And, while other stocks haven’t fallen as swiftly, they have fallen as far or more from their peaks:
Galaxy Entertainment -23 percent
SJM -22
MGM China -22
Melco Crown -21
Sands China -16.8
Wynn Macau -16.5
The collapse has come despite all six Macau concessionaires initiating dividends—special or regular—and despite double-digit gaming revenue growth over last year.
The declines came about because China’s economic growth really does appear to be seriously slowing now, and the most recent Macau revenue comparisons weren’t quite as giddily strong as those of just a couple weeks ago.
The declines also were predictable, as the above-mentioned clichés could have foretold.
For us, the signal of a top was a sell-side analyst report raising stock price targets on WYNN, LVS and MGM Resorts based on Japan possibly legalizing casinos.
It’s one thing to continually increase earnings forecasts and valuations to the point of perfection, and to incorporate value into a stock price for a casino that won’t open for two, three or four years. That’s bullish enough.
But to incorporate value for legislation that might never pass, for which tax rates and regulations have yet to be written, and for licenses that have yet to be awarded or licensees selected…
Well, let’s just say that’s frothy, and a call for a correction.
And correction, we think, is what is happening now.
Macau-oriented casino operators aren’t cheap yet, but they aren’t nearly as expensive as before with LVS and Melco Crown at 17 times future earnings, and WYNN at 22.
Indeed, a case be made that LVS and MPEL are actually cheap now as growth stocks.
LVS is an aggressive dividend payer and stock re-purchaser. Its Macau casino complex has plenty of capacity to absorb growth. And it still has more hotels coming.
MPEL has just announced a policy of paying out 30 percent of net profits in dividends, and it has the most ambitious regional growth pipeline in Asia.
And, both LVS and Macau are selling at reasonable prices compared to future growth. LVS’ PEG ratio is 1.27 as of this writing and MPEL’s just 0.45.
This doesn’t mean that the sell offs won’t continue. As everybody knows, a trend is a trend until it stops, and momentum definitely has been on the downside in recent weeks.
But based on fundamentals, and tangible growth projects, at least these two stocks should find a floor soon.
IGT: A Buy At Last?
It was not a pretty picture that IGT presented when the company reduced earnings guidance several days ago.
And, some of the difficult trends aren’t likely to reverse soon. In fact, the competition in North America will intensify as both small companies bubble up and deep-pocketed competitors move in, including the latest, European giant Novomatic.
Yet, the case can be made that IGT is at or near a bottom. The company is still America’s biggest slot maker with the most comprehensive product line, and a growing Interactive business.
And the $50 million cost-cutting program will position IGT to grow more rapidly when casino business bounces back, which will happen at some point, and perhaps soon now that the long and bitter winter is over.
IGT is especially sensitive to the health of the casino industry as nearly half of its business is gaming operations.
Finally, valuation is now cheap with the stock selling at less than 11 times earnings, PEG ratio under 0.90 and enterprise value-to-EBITDA under 7.
Other supplier stocks have come down and are more attractive, too.
Bally stock at 12.5 times forward earnings is well within its growth range. And Multimedia Games, having sold off 33 percent, now has a PEG ratio of 1, enterprise value-to-EBITDA under 8, and is still in the early stages of entering major new markets like Nevada, Pennsylvania and big Mid West states.
