Rolling the dice on Macau casinos
Gambling revenue from casinos in Macao soared last year to nearly $33 billion -- many times the revenue earned in gaming meccas like Las Vegas.
The Year of the Dragon is off to an explosive start, as much of Asia and Chinese communities worldwide greeted the lunar new year with fireworks and festivities.
But the party atmosphere is nothing new for the casino business in Macau, the destination of choice for Chinese gamblers, a large and avid gaming community.
Gambling revenue from casinos in the former Portuguese colony soared 42% last year to hit nearly $33 billion -- many times the revenue earned in gaming meccas like Las Vegas. That's a slightly slower pace of growth than the 58% jump recorded in 2010 over 2009 levels, but it's enough to keep investors buzzing about the potentially limitless upside for Macau gaming, perhaps one of the few recession-resistant businesses in existence. Even better, there's room for growth: Most of those revenues come from gaming, so there's still plenty of opportunity for casino operators to boost earnings further by getting visitors to fork over for entertainment, food and lodging.
That said, valuations on many of these casino stocks are rich, and you don't have to go far to find bears voicing worries that range from fears of Chinese government policy changes (on everything from the issuance of visas to monetary policy) to money laundering. But in a note to clients yesterday, analyst David Bain of Sterne Agee discounted many of those issues and raised his forecast for earnings on a cluster of stocks whose fortunes are tied to the Macau casino scene.
Bain's top pick is Melco Crown Entertainment (MPEL), which he believes has properties in premium locations and is continuing to attract high-roller VIPs -- the key to profitability. Bain also argues that Melco is trading at a discount to gaming rivals that also have big stakes in their Macau subsidiaries. The stock traded Friday for $11.64 a share; the median analyst estimate calls for it to hit $13.24 and last month Wells Fargo resumed covering the stock with an "outperform" rating.
Las Vegas Sands (LVS) is another company with heavy exposure to Macau that Bain believes is poised to earn more than he had previously expected. And even after recent gains, the stock still hovers near levels seen a year ago at this time, despite an improved outlook. Bain is also positive on MGM Resorts International (MGM), despite an official rating of "neutral." He believes the company's MGM China division accounted for 31% of its total revenues in the fourth quarter, up from 11% in the second quarter -- and zero in 2010.
So is investing in casino companies with a large or growing footprint in Macau a solid bet? None of these stocks look cheap -- Melco Crown and Las Vegas Sands each trade for more than 30 times trailing 12-month earnings -- but Bain argues there are plenty of short-term opportunities right now, as these companies are poised to post higher earnings in the coming year. He believes Macau's gross gaming revenues will jump another 19% -- well above the consensus -- thanks to the scheduled opening of Cotai Central (a Las Vegas Sands property) in March and the opening of a new rail line later this spring.
Admittedly, it's not impossible that Chinese gamblers may decide to stay home and roll the dice by investing their cash in the Chinese stock market. But given that the Shanghai Stock Exchange composite index lost some 20% in 2011, perhaps they'll decide to keep investing in trips to Macau in the belief that the baccarat table offers better odds.
Photos: China's Newly Rich
States Betting on Big Year for Online Gambling
China Goes Nuts Over Pecans
Copyright © 2014 Microsoft. All rights reserved.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.