Are stocks of casino companies nearing their upper limits?
A quick look at some simple fundamental measures suggests they may be and might need to settle down awhile and let growth and business fundamentals catch up.
Here’s a sample of forward price-earnings ratios:
Boyd 24 times
Caesars 27
Churchill Downs 21
Eldorado Resorts 19
Full House Resorts 54
Golden Entertainment 23
Las Vegas Sands 20
Melco Entertainment 16
Monarch Casino 21
MGM 17
Penn National 19
Red Rock Resort 24
Wynn 17
Not a low PE among them, though quality growth companies like Wynn at 17 and Las Vegas Sands at 20 aren’t overpriced and might even be called cheap; and Melco at 16 is cheap, given its growth prospects.
Let’s look at another measure commonly used to value casino companies: enterprise value (net debt plus stock market value) to EBITDA:
Boyd 12
Caesars 18
Churchill Downs 18
Eldorado 14
Full House 12
Golden 18
Las Vegas Sands 13
Melco 12
Monarch 14
MGM 11
Penn National 9
Red Rock 10
Wynn 13
Again, no pure bargains, but PENN in single digits and several companies at 14 times and under are within reason.
And, of course, these ratios do not account for what will happen as Caesars, Penn National, Boyd and Eldorado all have significant pending acquisitions from which they intend to squeeze out costs.
Nor does enterprise value-to-EBITDA look at future business.
In addition to cost savings, all major regions are growing—Macau, U.S. regional and Las Vegas. Macau growth has decelerated but still looks to be at high single or low double digits on the revenue line. In the U.S., regional revenues have been accelerating after a tough winter and early spring thanks to severe weather in much of the country.
There are also expansions, renovations and cost-cutting programs at almost every company independent of those expected from acquisitions. Red Rock Resorts, for example, is about to enjoy the benefits of capital projects at Palace Station and the Palms in Las Vegas. MGM, Boyd and Caesars continue to benefit from systematic cost reduction programs.
Monarch and Full House Resorts have Colorado projects that can be transformational. Monarch opens its namesake property as a destination resort in Black Hawk next year, and Full House plans a similar, though smaller project in Cripple Creek, though it is still several years off.
Stock values also are buoyed by dividends as nearly every major operator now rewards shareholders with cash payouts to add to stock appreciation in the calculation of total return to shareholders. Then there is the arrival of gaming REITs, which are making acquisitions manageable financially for buyers and rewarding for sellers.
Finally, legal sports betting is starting to proliferate with considerable consumer enthusiasm so far. The result will be new revenue streams and the attraction of more gamblers to casinos, especially for companies in states that have, or are about to launch sports betting– Delaware, New Jersey, Mississippi, West Virginia.
In summary, casino stocks generally have grown to valuations beyond their historic norms and might take a breather, but enough has changed to justify higher valuations, and any breather provides time to do the fundamental analyses that can lead to investments generating good long-term returns.
