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International Vision

Large global companies are making moves to bolster their values

International Vision

As the casino industry continues its evolution, large international operators dominate the one-time domain of private owners and riverboats increasingly.

And, while there are still plenty of privately owned enterprises and big single-market companies, such as Macau casino operators SJM and Galaxy, the names Las Vegas Sands, Genting—in its several iterations—Wynn and MGM Resorts are most often mentioned when huge international projects are discussed.

By market value and most other measures, Las Vegas Sands is by far the largest company. Its stock is worth more than $60 billion, several times that of Wynn, MGM and the combined Gentings of Singapore, Hong Kong and Malaysia.

Others might join the club. Melco Crown has a market value of around $20 billion. Its largest shareholders, Melco International and Crown Resorts, add more heft. And MPEL is the first of the Hong Kong-listed Macau operators to expand outside the enclave, setting up Melco Crown Philippines for its part of City of Dreams Manila.

In effect, the casino industry is reaching the maturation of other industries, such as automobiles, hotels, media and consumer electronics, where giants compete globally.

That competition will be in full view if Japan legalizes casinos along the lines expected—one mega-resort each in Tokyo and Osaka, plus regional casinos.

Already, CEOs Sheldon Adelson of Las Vegas Sands, Steve Wynn of Wynn Resorts and Lawrence Ho of Melco Crown have said they are prepared to invest more than $5 billion in Japanese casinos. Adelson suggests maybe even $10 billion. 

The international competition has also reached the U.S., where Genting is building multibillion-dollar Resorts World Las Vegas, is angling for a full casino in New York where it will have a huge slots casino, and is ready to finance Mashpee Wampanoag casino ambitions in Massachusetts. Genting was the original financier of Foxwoods back in the 1990s when no real bank would consider Indian gaming.

So, what are the investment implications?

For one, these stocks are up against the law of big numbers.

Wynn can grow nearly 20 times from its IPO price of $11, but it isn’t likely to grow 20 times from $200.

And, yet, such big corporations offer advantages that faster-growing small fry can’t.

In most industries, that includes downside protection. Market leaders have safety in things like economies of scale, geographic diversity and product diversity.

If a Johnson & Johnson product flubs, the company has hundreds of others to keep revenues flowing in.

And if one country or market is in recession, there are growth areas to make up for it.

Those advantages aren’t quite there in gaming, yet.

Wynn, for example, operates just in Las Vegas, but mostly in Macau. Las Vegas Sands has some diversification in Singapore, its retail malls and convention businesses.

MGM is the broadest-based of the giants, heavily invested in Las Vegas, but with casinos throughout the U.S. and a Macau operation.

MGM promises to diversify further as it develops a major casino outside Washington, D.C., and likely in Massachusetts. And, while LVS and WYNN are focusing on Tokyo, MGM appears likely to go for a regional casino in Japan. The company is also in the early stages of entering the non-gaming hotel business internationally.

Another advantage of big international corporations is paying dividends while growing steadily.

Famed Wharton professor Jeremy Siegel once tracked the performance of stocks in the S&P 500, going back decades.

He found that the best long-term returns were not in the hot growth stocks, but in venerable giants like Standard Oil (now Exxon), where steady growth combined with reinvested dividends.

However, the gaming giants, with increasingly generous dividends, aren’t quite there yet, either. That is because one of the biggest differences Siegel found in long-term wealth creation was in the current stock price. A Standard Oil could be bought at 10 times earnings, but the hot growth stock cost 20 or 30 times.

The gaming giants are still priced for growth, with companies like Wynn at 30 times trailing earnings.

But dividends are a big part of their return.

Tom Marsico of Marsico Capital once pointed out to Steve Wynn on an investor conference call that WYNN’s dividends have been greater than the original IPO price.

“You’re paying me to own the stock,” he told Wynn.

Adelson likes his company’s dividends. His motto, that Adelson said on LVS’ first quarter investor call: “Pay dividends.”

And LVS stock, selling at 17 times projected earnings, isn’t all that far from the big over-time winners Siegel discusses in his famous book, Stocks For The Long Run.

Siegel also found that buying an S&P 500 index fund went a long way towards taking advantage of the historical trends.

A gaming alternative might be a basket of the international dividend payers—Wynn, Las Vegas Sands, Melco Crown.

Another difference is that casinos operate in a privileged industry, thus subject to political whims.

In Macau, for example, there is concern over financial terms the government will extract from operators when it comes time to renew gaming concessions, and, at least theoretically, whether all concessions will be renewed.

So, the big-cap casino operators share some attributes of internationals in other industries, but they still have major differences of concentration of business, high stock valuations and vulnerability to government policy and politics.

Of course, investors in other industries might still envy the one quality the big gamers have in common—growth potential.

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