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Updated on December 18th, 2020 by Aristofanis Papadatos

As the saying goes, the house always wins. Casinos operate strong business models, as casinos earn a virtually guaranteed profit from the sum of the bets they receive. The relatively attractive economics of casinos make the industry worthy of a closer look.

As the saying goes, the house always wins. Casinos operate strong business models, as casinos earn a virtually guaranteed profit from the sum of the bets they receive. The relatively attractive economics of casinos make the industry worthy of a closer look.

Investors may be particularly intrigued by the earnings growth and dividends of the major casino stocks. The 4 major publicly-traded casino stocks were paying dividends to their shareholders before the onset of the pandemic, but they have either suspended or drastically reduced their dividends due to the severe downturn in their business.

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Casinos are not without a fair amount of risk. Casinos are highly vulnerable to recessions, as consumers typically cut back heavily on gaming when the economy enters a downturn. The four major casino stocks saw their earnings collapse during the Great Recession. A similar impact has taken place to start 2020 due to the coronavirus crisis, which has battered the casino industry.

We have analyzed the major casino stocks in the Sure Analysis Research Database, which ranks stocks based upon the combination of their dividend yield, earnings-per-share growth potential and valuation to compute expected total returns. In this article, we will compare the expected 5-year total annual returns of the four major casino stocks.

Table Of Contents

For this article, stocks are ranked in order of least attractive to most attractive. While 5-year expected returns are incorporated in the rankings, we have also utilized a qualitative screen based on balance sheet strength and overall business quality.

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Casino Industry Overview

The casino industry is in severe distress right now. The spreading coronavirus and resulting global recession have taken their toll on the casino stocks. The large U.S. casinos are heavily reliant on Macau, the largest gaming market in the world and the only market in China where casinos are legal. As a result, these stocks are very sensitive to any developments that affect the gaming activity in Macau.

This was a significant concern several years ago. In 2014, China initiated an anti-corruption regulatory crackdown, which greatly reduced the gaming activity in the area. Fortunately for the casinos, the downturn lasted for approximately two years and gaming activity in Macau recovered thereafter. Then the gaming activity in Macau faced another headwind, namely the trade war between the U.S. and China.

This headwind lasted for only about a year but now Macau is facing its strongest challenge ever, the outbreak of coronavirus, which has caused a huge hit in the gaming business. Casinos were shut down for an extended period due to the coronavirus. Casinos have now reopened but strict visa restrictions and requirements for a negative COVID test have kept tourism at depressed levels and thus they have caused daunting gaming activity in Macau.

As a result, gross gaming revenue in Macau has plunged 80.5% in the first eleven months of this year, compared with the same period last year. The trend was slightly better in November, when gross gaming revenue in Macau declined 70.5% over last year’s month. The high sensitivity of casino stocks to all the developments related to China and their pronounced cyclicality means that investors should pick casino stocks carefully.

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Top Casino Stock #4: Wynn Resorts (WYNN)

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Wynn Resorts owns and operates Wynn Macau and the Wynn Palace in Macau, as well as Wynn Las Vegas and Encore in Las Vegas. The company is now facing the headwind of coronavirus in all the regions in which it operates. Wynn Resorts reported its financial results for the third quarter on 11/5/2020. Revenue declined 78% year-over-year to $370.5 million, which was $64 million less than expected. Even worse, the company widened its losses per share sequentially, from $6.14 in the second quarter to $7.04, missing estimates by an eye-opening $3.15.

All the properties of Wynn Resorts were open for nearly the entire third quarter but the results of the company were once again severely impacted by the COVID-19 pandemic due to the enforced restrictions, including quarantine requirements for tourists, requirements for a negative COVID test, limited number of players at tables and slot machines as well as the significant visa restrictions in Macau.

Due to all the above restrictions, the revenues of Wynn Palace plunged 97%. Revenues for Wynn Macau decreased 89% while Las Vegas revenues decreased 53% year-over-year. Wynn Resorts has suspended its dividend this year in an effort to conserve capital. Notably, the consensus estimates have greatly deteriorated in the last five months, from a call for a loss of $10.84 per share in 2020 in July to a call for a loss of $18.59 in 2020 right now.

On the bright side, some vaccine studies have reported very promising results and billions of vaccines will be distributed worldwide in 2021. As a result, Wynn Resorts will have ample room to grow in the upcoming years thanks to its promising growth pipeline.

Source: Investor Presentation

The company has made progress in the design of Crystal Pavilion in Macau, which will be a major tourist attraction. In addition, Encore Boston Harbor opened in June-2019 and has exhibited decent performance so far so it has promising growth prospects ahead thanks to expected ramp-up in activity. Moreover, Wynn Resorts aims to expand to Japan, which legalized casino gambling three years ago, though it will take many years before the company opens a casino in Japan.

On the other hand, the company has been caught off guard, with net debt of $10.8 billion, which is 88% of the current market capitalization of the stock. Therefore, the stock is carrying an increased amount of risk right now due to its high level of debt.

However, we believe that the coronavirus crisis will subside at the second half of next year and we view the long-term growth prospects of the company as intact. We expect 4% annual earnings-per-share growth off their mid-cycle level through 2025. Using the company’s current assets, return on assets of 5.6% over the last decade and share count, we believe Wynn Resorts has earnings power of $1.89. We will use this figure to calculate fair value and projected return.

Based on the earnings power estimate for 2020, the stock is currently trading at a P/E ratio of 51.8, which is much higher than its historical average of 30.1. However, the stock traded at abnormally high P/E ratios in some years due to depressed earnings in those years.

For instance, the abnormally rich valuation of the stock during 2015-2017 resulted from the market’s view that the downturn in Macau was temporary. Our target P/E ratio of 18 reflects uncertainty regarding Macau and the coronavirus. If shares reverted to our target P/E by 2025, then valuation would be a 19% headwind to annual returns over this time period.

If the stock reaches our fair valuation level over the next five years, it would reduce shareholder returns by 19%, effectively wiping out earnings growth and dividends over that time period. In other words, the market has already priced a strong recovery from the pandemic in the stock of Wynn Resorts. In addition, the stock is markedly volatile due to its high debt load, which is an additional risk factor.

As a result, only those who can stomach extreme stock price volatility and have confidence in the ability of Wynn Resorts to navigate through the current crisis may consider buying the stock but even those investors should wait for a better entry point.

Top Casino Stock #3: MGM Resorts (MGM)

MGM Resorts owns and operates casinos, hotels and conference halls in the U.S. and China. The company has the least exposure to Macau in this group of stocks. As a result, it suffered much less than its peers from the trade war between the U.S. and China and the protests of people in Macau a few months ago.

However, the company is highly exposed to the outbreak of coronavirus, just like its peers. Due to the rapid spread of the coronavirus, MGM Resorts suspended all its casino operations in Las Vegas for a considerable period in the second quarter.

In late October, MGM Resorts reported (10/29/20) financial results for the third quarter of fiscal 2020. The company had all its properties open at the end of the quarter. However, its revenue plunged 66% over last year’s quarter due to the suspension of the operations of the company in the U.S. for part of the quarter and a collapse in gaming revenues in Macau caused by travel restrictions, including strict requirements for COVID test and lengthy visa procedures.

Source: Investor Presentation

As a result, MGM Resorts switched from a profit of $0.31 per share in last year’s quarter to an adjusted loss of $1.08 per share.

Due to the unprecedented downturn that has resulted from the pandemic, MGM Resorts cut its dividend by 98% in April. Moreover, in May, it issued $750 million of 5-year bonds at 6.750%. The high interest rate reflects the desperation of the company for funds and the high debt load of the company. Net debt is $20.1 billion, which is 130% the current market capitalization of the stock.

On the positive side, on August 20th, 2020, IAC (IAC) reported a 12% stake in MGM Resorts for approximately $1 billion. IAC has a portfolio of brands and digital expertise, which is expected to help MGM Resorts leverage its digital assets. IAC will join the Board of Directors of MGM Resorts. The stock jumped 12% on the announcement.

Nevertheless, due to the headwind of coronavirus, along with a huge debt load, shareholders should not expect a material boost in dividends and share repurchases for the foreseeable future. That said, we expect the pandemic to subside at the second half of 2021 thanks to the massive distribution of vaccines worldwide. MGM Resorts has a positive long-term outlook for conventions and sports betting in the domestic market, as well as the ramp-up of the recently-built MGM Cotai resort, MGM Springfield, and Park MGM.

As soon as the coronavirus crisis comes to an end, MGM Resorts will benefit from these growth drivers. The company will also enhance its earnings growth via its initiative “MGM 2020”, which aims to expand margins by reducing operating costs and enhancing the efficiency of the company.

Due to the headwind from coronavirus, we expect MGM Resorts to report a net loss of $3.50 per share in 2020. Earnings-per-share are expected to gradually turn positive, with expected annual growth of 5% through 2025. After the massive dividend reduction, returns from dividends will be negligible until the full dividend is restored.

Finally, the market has already priced a strong recovery in the stock and hence we expect the valuation multiple of the stock to contract significantly in the upcoming years. That could be an additional headwind for shareholders. Overall, we expect negative total returns from MGM Resorts over the next five years.

Top Casino Stock #2: Melco Resorts (MLCO)

Melco Resorts owns and operates casino gaming and entertainment casino resort facilities in Asia. As Melco Resorts is the most leveraged to the gaming activity in Macau in this group of stocks, it is the most vulnerable company to the downturn in the area due to the outbreak of coronavirus.

In 2019, Melco Resorts grew its revenue 11% and its earnings per share 15%, primarily thanks to its strong performance in the mass market table gaming activity. However, conditions have predictably reversed due to the pandemic, with third-quarter revenue declining 85% and adjusted property EBITDA declining to a loss of $76.7 million.

Source: Investor Presentation

Melco Resorts is expected by analysts to lose $2.70 per share this year. The losses have resulted primarily from the strict travel restrictions in Macau, which requires a negative COVID test from tourists while the issuance of tourist visa has become a lengthy procedure due to the pandemic.

On the bright side, some vaccine studies have reported exciting results and hence billions of vaccines will be distributed worldwide in 2021. It is thus reasonable to expect the pandemic to subside at the second half of 2021. As soon as the effect of coronavirus begins to fade, Melco Resorts has promising growth prospects ahead. It will benefit from the ramp-up of activity in its Morpheus Resort, which opened in mid-2018, and will attract an increasing number of visitors in Cotai thanks to improvements in mass transportation.

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Melco Resorts is also expanding its City of Dreams in Macau and is taking steps to open an integrated resort in Yokohama, Japan. It is also developing City of Dreams Mediterranean, which will become the largest integrated resort in Europe. All these initiatives are likely to be significant growth drivers as soon as Macau returns to normal.

On the other hand, due to its extreme leverage to gaming activity in Macau, the stock is highly vulnerable to any negative development related to coronavirus. Therefore, despite the promising growth prospects, investors should hold conservative expectations for Melco.

Overall, we expect 2% average annual growth in earnings per share over the next five years, from a mid-cycle level of $1.00 to $1.10 in 2025. Moreover, the stock is currently trading at 18.7 times its mid-cycle earnings per share. We view the stock as fairly valued and hence we do not expect the valuation of the stock to play a major role in its 5-year return.

Therefore, shareholder returns will be fueled by earnings-per-share growth. The stock had a 3% dividend yield before the pandemic, but the company has suspended its dividend for the foreseeable future in an effort to preserve cash. Therefore, total returns are expected at just ~2% per year until the dividend is restored.

Given its healthy balance sheet, the company is likely to resume paying dividends once the coronavirus crisis ends. On the other hand, income-oriented investors should remain cautious, as the company is highly vulnerable to economic downturns and is very sensitive to any casino-related policy change in China and the ongoing coronavirus crisis.

Top Casino Stock #1: Las Vegas Sands (LVS)

Las Vegas Sands is a leading developer and operator of integrated resorts in the U.S. and Asia. Due to the outbreak of coronavirus, Las Vegas Sands is facing strong headwinds in Macau and in the U.S. As mentioned above, gaming activity has collapsed in Macau. In addition, due to the propagation of the virus in the U.S., all the casinos in Las Vegas were closed for a considerable period in the second quarter. As a result, Las Vegas Sands is expected to lose approximately $2.00 per share this year.

On the other hand, beyond this year, Las Vegas Sands has promising growth prospects ahead. As Japan legalized casino gambling three years ago, Las Vegas Sands has announced that it intends to open integrated resorts in Tokyo and Yokohama. The company is the favorite bidder in this contest, which is expected to be a significant growth driver, though it will take a few years until the company earns a license and builds its new properties in Japan.

Due to the pandemic, Las Vegas Sands has suspended its dividend since early 2020. However, the company has promising growth potential and is likely to restore its typical high dividend yield as soon as the pandemic subsides, most likely at the second half of 2021. Las Vegas Sands earns the top ranking thanks to these features as well as its strong balance sheet and healthy liquidity.

Source: Investor Presentation

Furthermore, Las Vegan Sands continues to pursue growth by expanding and upgrading its Macau properties. The company launched Four Seasons Tower Suites Macao last year while it also expects to launch the Londoner Macao in January-2021 and expand Marina Bay Sands in Singapore.

In addition, Las Vegas Sands will benefit from the debut of the light rail system connecting Macau to the entire China rail network. This project will significantly increase the traffic to the casinos in Macau when the pandemic subsides and the strict travel restrictions in Macau are lifted. Thanks to all these growth drivers, we expect the company to grow its earnings per share by about 4% per year over the next five years off their mid-cycle level of $3.20 per share.

Las Vegas Sands stock previously offered a hefty dividend of $3.08 per share annualized, but the company suspended its dividend in 2020 amid the coronavirus crisis. If the company were to reinstate its dividend at the same level, shares would yield 5.4% at the current stock price.

The company is expected to lose about $2.00 per share in 2020 due to the pandemic but our estimate of its full earnings power in a normal economy is annual earnings-per-share of $3.20. Based on this, the stock has a price-to-earnings ratio of 17.8, which is slightly higher than our fair value estimate of around 17.0. Given 4% earnings growth, a normal 5.6% dividend yield and a modest valuation headwind, we expect Las Vegas Sands to offer a 7.4% average annual return over the next five years.

We also believe that Las Vegas Sands has the strongest balance sheet in its peer group. This means that the company is likely to easily navigate through the ongoing coronavirus crisis and will enjoy a strong recovery whenever the headwind disappears from the horizon.

Final Thoughts

Gaming activity in Macau enjoyed a strong recovery from 2017-2019 but Macau is currently facing a severe downturn due to the coronavirus crisis. The same is true for the U.S. as well, as the pandemic has resulted in weak gaming revenues. As a result, all the above casino stocks are going through a fierce downturn right now.

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On the bright side, the vaccine studies of Pfizer and Moderna have reported exciting results, with effectiveness above 90%. In addition, the studies of AstraZeneca and Johnson & Johnson are promising. Overall, thanks to markedly positive developments in the vaccine studies, billions of vaccines are expected to be distributed worldwide in 2021. As a result, the pandemic is likely to subside at the second half of 2021.

However, this does not mean that investors should rush to buy casino stocks. The market has already priced a strong recovery in these stocks and hence investors should be especially careful before initiating a position.

Melco Resorts seems the least attractive choice whereas Las Vegas Sands has by far the most attractive risk/reward profile. Wynn Resorts and MGM Resorts offer much lower expected returns than Las Vegas Sands. Additionally, we prefer Las Vegan Sands for its superior balance sheet, which is paramount during severe downturns.

While we expect the coronavirus crisis to end in 2021, no one is absolutely sure when this crisis will end. To provide a perspective for the severity of the downturn, all the U.S. casino companies asked Congress for emergency financial help a few months ago.

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Moreover, all the casino stocks have incurred hefty losses this year due to the shutdown of their properties and the collapse in the number of travelers due to strict travel restrictions. Furthermore, all the casino stocks have suspended or decimated their dividends in an effort to preserve cash and endure the crisis.

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It is thus critical for investors to make sure that their companies can easily endure a prolonged crisis without being devastated. Therefore, the superior balance sheet of Las Vegas Sands is a crucial parameter. If the pandemic subsides sooner than expected, the leveraged casino stocks will probably rally more than Las Vegas Sands. On the other hand, if the pandemic continues to weigh on the casino industry longer than expected, Las Vegas Sands will likely outperform its peers thanks to its financial strength.