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Casino Stocks Are a Bad Bet


What happens in Macau doesn't necessarily happen in Las Vegas.

Investors have wagered hard on the gambling stocks but, at their current prices, it's hard to see why stock pickers should double down on this bet.

Wynn Resorts (WYNN) made headlines over the weekend when the Las Vegas-based company said it has increased the size of the initial public offering in Hong Kong for its Macau unit by 25%, looking to raise up to $1.6 billion, according to Reuters. Wynn's rival, Las Vegas Sands (LVS), is also busy, hoping to raise $1 billion to $2 billion through the sale of a stake in its Macau operations, possibly at the end of November.

Investors have gone all-in with the gambling stocks: Over the last six months, Wynn is up 232%, MGM Mirage (MGM) has skyrocketed 329%, and Las Vegas Sands has surged 673%.

Why the enthusiasm? The stocks have run off the bottom as investors bet on better times ahead for the consumer. Also, there's now less fear about these companies going belly up.
However, casino analysts remain cautious, for good reason.

Yes, Macau is showing signs of improvement, but Sin City still confronts a range of challenges -- and those hard headwinds, coupled with unattractive valuation, make it hard to see how the gambling industry is a smart bet right now.

One reason for optimism about the casino operators: Analysts note that these companies, while highly leveraged, have worked hard to strengthen their balance sheets.

"A lot of these companies have very stressed out balance sheets," says Robert LaFleur, casino analyst at Susquehanna Financial Group. "As a result of refinancing activity and some equity raises, they have gotten into much better shape recently."

There's also been better news lately out of Macau, analysts say, with an easing in visa restrictions so more gamblers can spend their paychecks at the slot machines and blackjack tables. Macau is China's only gaming destination, and it benefits from the booming middle class and high population density in that area of the world, notes Morningstar analyst Michelle Chang.

Macau is within a three-hour flight of more than one billion people and a five-hour flight of more than three billion people. Little wonder then that Macau surpassed the Las Vegas Strip as the largest gaming market on the planet.

The growth in Macau is positive news for casino operators with exposure to the area, such as Wynn Resorts and Las Vegas Sands. However, domestic gambling companies like MGM, which are more dependent on Vegas than far-flung Macau, face potentially tougher times.

"Las Vegas still has numerous problems it has to deal with," LaFleur tells Minyanville. "Visitor volumes to the city have returned to normal levels from some of the displacement in the fall but room rates, which are a key contributor to profits for Las Vegas operators, are very low."
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