Will Macau table limits slam casino stocks?

The casino business is growing fast in Macau. The Chinese government may have other plans.

By Jamie Dlugosch Mar 26, 2010 11:57AM

Gambling © Jamie Grill/PhotolibraryCasino stocks Wynn Resorts (WYNN) and Las Vegas Sands (LVS) have exploded higher over the last year, but owning these stocks just got a whole lot riskier.


Sands is up a whopping 775% since bottoming at $2.70 per share last spring. Wynn is up 390% from about the same time.

One reason for the gains: Expansion in China, specifically Macau. What then to make of the news that China plans on limiting gambling expansion?


For investors looking at Macau as a new Vegas with unlimited potential, the outlook may need to be adjusted. What remains unclear is how the Macau government plans on implementing its limits on the number of gaming tables.


Will all resorts be required to sacrifice, or does this new limit apply only to new development? Either way, the order means fewer dollars for the casino companies.


The news is negative for investors not just for the immediate term, but for future.


We've already seen the power of China's centralized government in action. Internet search giant Google (GOOG) has been battling China over censorship issues, and recently redirected users to its Hong Kong site to try to escape the issue.


The economic advance of China is a wonderful story, to be sure, but companies still face roadblocks in dealing with a communist authoritarian government.


If the government wants people to act in a certain way, it will use its power to make sure that happens. In this case, this announcement signals that the central government isn't all that happy with its citizens' gambling.


As for Wynn and Sands, both of these stocks look fairly expensive even before considering slower growth in China. Casino stocks can be cash cows for investors, but that does not mean they are a bargain at any price.


Sands is expected to make 27 cents per share in 2010, according to analyst estimates. That puts shares at a hefty 77 times forward earnings. That multiple drops to 36 times after taking into account the 2011 estimate of 59 cents per share.


The 2010 estimate for Wynn is 57 cents per share, giving the company a valuation of 133 times forward earnings. The multiple does drop to 72 times earnings using the 2011 estimate of $1.05 per share.


These stocks are priced for perfection. One little blip and these stocks could go poof. That makes the news out of China disconcerting for anyone investing in the sector. (Five casino stocks that will beat the house despite Macau)


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