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3 casino stocks with the hottest hands
With a recovery in tourism and relaxed gambling rules in many states, gaming stocks are on a roll. Here's a look at the industry's high rollers and where you might place your bets.
By Robert Walberg
It is that time of year when everyone becomes an expert in college basketball. Dicky V, you have nothing on us, baby! As for myself, I have determined, after an exhaustive review of the team capsules provided in the USA Today that the NCAAs Final Four will consist of Georgia Tech, Oklahoma State, Duke and UConn. And the national championship goes to . . .
Not so fast. Before I reveal my basketball pick, lets review one of March Madnesss other big winners -- the casino industry -- and see if we cant come up with a few winners.
The casino industry has been on a roll in recent months, with the Dow Jones Casino Index, ($DJUSCA) posting a robust 12.7% gain year-to-date. By comparison, the Dow industrials ($INDU) and the Nasdaq Composite ($COMPX) have shed 2.9% and 3.3%, respectively. Whats most impressive is that the sector's gains come on the back of strong results last year. While much of the market has lost its momentum over the past month, gaming stocks continue to drop one ace after another.
Industry on a roll
Whats behind the industrys success? First, the sector has benefited from the rebound in the overall economy. A strong economy gives consumers more discretionary income, which typically translates into increased leisure travel. Thats good news for Las Vegas, one of the worlds top tourist destinations.
Monthly data confirm the improved operating climate, as Atlantic City casinos posted a record 30% jump in February revenues. Even adjusting for the opening of the new Borgata Hotel Casino & Spa, revenues were up 14% year-over-year. Though weather played a factor, as did the calendar (extra weekend days), the underlying trend is clearly positive.
The same can be said for Vegas, which has posted solid revenue gains each month this year, especially on the Strip. Casino operators cite higher room rates due to strong demand and increased table wins for the strong numbers.
Will the streak keep rolling?
Will the industry remain on a hot streak for the balance of this year, or is it time for investors to cash in their chips? Technically, the industry is a bit overextended with many of the stocks trading at abnormally wide divergences from their long-term moving averages. While this suggests that the group could succumb to some light profit-taking over the near-term, it by no means indicates that investors should fold their hand.
Fundamentals in the casino group are strong, and theres no reason to think that the backdrop will change significantly in the months to come. The domestic economy continues to grow at a healthy pace, and Asian economies are strong, good news given that many high-rollers come from this geographic region. Relatively high occupancies suggest that the industry has overcome capacity concerns and pricing remains firm. Meanwhile, many overburdened state economies are considering expanding (or already expanding) gaming operations to help generate revenues and reduce ballooning budget deficits.
Given the favorable industry climate, the industry is expected to deliver earnings-per-share growth of 16.9% in the current year compared with only 13% for the S&P 500 ($INX). However, with the revenue numbers rising strongly early in the year, dont be surprised to see the companies beat street estimates handily in the upcoming quarter. For example, Caesars Entertainment (CZR, news, msgs) recently upped its first quarter EPS guidance to 17 cents from 19, well above the consensus estimate of 12 cents. In general, estimates in the industry have been trending higher over the past 30 days.
Nothing moves stocks like strong earnings growth. Consequently, investors should use any near-term price weakness as an opportunity to buy into the casino group, as top- and bottom-line trends are very bullish.
4 high rollers at the table
Now comes the hard part: determining the winners from the also-rans. Just as in the NCAA pool, the casino industry has its heavy hitters and its smaller, less well-known companies. The big boys are Harrahs Entertainment (HET, news, msgs), Mandalay Resort Group (MBG, news, msgs), Caesars and MGM Mirage (MGG, news, msgs). Second-tier players include Boyd Gaming (BYD, news, msgs), Isle of Capri Casinos (ISLE, news, msgs), Station Casinos (STN, news, msgs), Argosy Gaming (AGY, news, msgs) and Wynn Resorts (WYNN, news, msgs). Finally, there are a number of much smaller players, including Aztar (AZR, news, msgs), Ameristar Casinos (ASCA, news, msgs), MTR Gaming (MNTG, news, msgs) and Lakes Entertainment (LACO, news, msgs).
To help narrow the field, I turned to the MSN Stock Screener. The goal was to find profitable, fiscally sound casino companies exhibiting strong price momentum, trading at reasonable valuations and sporting decent near-term growth potential. I screened for companies with a market-cap above $500 million that had a return on equity of at least 8%, net profit margins above the industry average, a current price/earnings multiple below the industry average and expected earnings growth of at least 8%. In addition, the stocks needed to have gained 25% or more in the past year, their 50-day moving averages had to be above their 200-day moving averages, and they needed a MSN StockScouter rating of at least 5.
3 names stand out to me
Of all the casino stocks, only seven met these criteria; they are listed in the table below. The most interesting to me are Aztar, Harrahs and MGM Mirage.
| Bobs Top Casino Bets | | Company | Market cap | ROE | P/E | % chg 12 mos. | StockScouter
rating | | MGM Mirage (MGG, news, msgs) | $6.4 billion | 9.3 | 27.7 | 61.1 | 6 | | Harrah's Entertainment (HET, news, msgs) | 5.7 billion | 16.8 | 19.9 | 54.6 | 8 | | Aztar (AZR, news, msgs) | 764 million | 11.4 | 13.8 | 78.3 | 5 | | Mandalay Resort Group (MBG, news, msgs) | 3.5 billion | 14.8 | 23.3 | 93.9 | 9 | | Ameristar Casinos (ASCA, news, msgs) | 723 million | 19.5 | 15.9 | 197.9 | 7 | | Isle of Capri Casinos (ISLE, news, msgs) | 781 million | 20.8 | 14.7 | 115.7 | 7 | | Argosy Gaming (AGY, news, msgs) | 949 million | 17.9 | 18.5 | 89.5 | 7 |
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At least for those of you that travel to Las Vegas on a regular basis, MGM is probably the most recognizable name. It owns, among others, the Bellagio, MGM Grand Las Vegas, The Mirage, Treasure Island, New York-New York and the Monte Carlo. It also owns the MGM Grand Detroit, the Beau Rivage in Biloxi, Miss., and 50% of the new Borgata in Atlantic City. Total revenues in 2004 are expected to eclipse the $4 billion mark. It is a well-known, well-run company with some of the best margins in the business and a relatively modest beta of 0.71, which means shares are less volatile than the broad market.
Harrahs is another large, very well-managed gaming company with revenues over $4 billion, relatively high margins and a track record of solid earnings growth. Unlike MGM, Harrahs derives most of its revenues off the Las Vegas Strip as it operates 26 casinos in 13 states. Its geographic diversity and history of relatively stable growth probably make it the most conservative play in the group, as reflected by the low beta of 0.41.
The wild card in the group is Aztar. This small-cap player has hotel-casinos in Atlantic City, Vegas and Laughlin and riverboat operations in Caruthersville, Mo., and Evansville, Ind. Unlike much of the industry, Aztar experienced some difficulties last year due in part to the disruption of operation from a construction accident at its Tropicana facility in Atlantic City. However, revenues and earnings are expected to reaccelerate this year and ramp significantly next year. Consequently, Aztar is one of the few casino companies still offering discounted valuations relative to the overall market.
Whether you like the big names or prefer to play the underdog is up to you, but these gaming stocks have all the makings of a champion. Speaking of champions, can there be any other winner in a place like San Antonio, Texas, than the Cowboys of Oklahoma State? Take it to the bank, baby.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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