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Casino Stocks Have Been On a Winning Streak

25 February 2015 in Trading Ideas

After the sector’s tough 2014, a turnaround in casino stocks wasn’t on the top of many prediction lists for 2015.

Those who did see a bottoming-out, however, have wound up recently looking smart.

The Casino Gambling motif has gained 8.8% in the past month. In that same period, the S&P 500 has increased 3.1%.

Over the past 12 months, however, the motif has lost 16.5% (the S&P 500 has gained exactly 16.5% since then), as casinos saw their performance in the ever-important market of Macau regressing as 2014 wore on.

As CNBC.com reported earlier this month, gross gaming revenue (amount wagered minus winnings returned to players) in the southern Chinese island fell 17.4% in January from a year earlier, marking the eighth consecutive monthly decline. That followed a 30.4% plunge in December and a 19.6% decrease in November on the back of varying factors including a decline in the number of VIP gamblers, regulatory curbs and a smoking ban.1

As with many reversals, however, the first sign of health is often a stabilization in how bad things are. According to Grant Covertson, a principal analyst at Union Gaming, that’s what the casino sector has just exhibited: A slowdown in the decline of monthly gaming revenue suggests that future revenue drops will be “less onerous” in coming months.

CNBC.com said Govertson believes share prices may soon rebound, with negative sentiment in the sector likely to bottom this quarter: “The government has taken various actions to ‘reset’ Macau and it seems they are back into making Macau the preferred entertainment destination of China.”

Investors have also become more optimistic on casino plays due to factors like valuation multiples trading below historical levels and China’s corrective efforts that have “cleansed” the gaming enclave, CNBC.com said.

Meanwhile, new casino properties due to open this year may help lift the fortunes of some operators, like Galaxy Entertainment, Govertson told CNBC.com. Macau’s second-biggest player expects the completion of new amenities by mid-2015.

CNBC.com also noted that Barclays has an overweight rating on Melco Crown, on hopes that the operator can reap better revenue growth when its Macau Studio City located along the Cotai Strip, opens by year end.

Despite the uncertainty in Macau, some casinos have managed to find success where they can. In its most recent quarterly earnings report, Las Vegas Sands said its quarterly revenue declined, but because its low-margin VIP business in Macau slowed, the company actually saw property EBITDA increase nearly 11%.2

Still, Las Vegas Sands was already pointing ahead to brighter days in Macau as a big part of its recovery. As part of the company’s report, CEO Sheldon Gary Adelson stressed that Las Vegas Sands was the largest casino operator in Macau, saying that upon completion of The Parisian sometime in 2016, it would have about 45% of the total sleeping rooms in Macau. The company’s event space is almost five times larger than the rest combined. Business and leisure travelers could come and have a good time even if they did not want to gamble, said Adelson.

Early in 2015, it appears that many casino-stock investors are betting on the idea that Macau may be down but not out.

1See Kit Tang, “It’s time to go all in on Macau gaming stocks: Pro,” cnbc.com, Feb. 5, 2015, http://www.cnbc.com/id/102394772, (accessed Feb. 23, 2015).

2Shuli Ren: Las Vegas Sands: Q4 Beat, Talks Up Mass and Event Revenue,” barrons.com, Jan. 28, 2015.