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LVS Versus MLCO: Which Casino Stock is Worth the Gamble?

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“Casino gambling is colorful and dramatic and theatrical.” — Steve Wynn.

Being one of the largest entertainment markets in the world, casinos seldom fail to build businesses. This is because demand for casino services is relatively inelastic, as it targets a fixed range of consumers, who will continue to visit casinos irrespective of market conditions. Subsequently, the gambling market is positioned for substantial growth in the long term. Per a report by Research and Markets, the casino gaming market in the United States is expected to see a compound annual growth rate (CAGR) of 4.74% in the 2017-2021 period.

Backed by a rise in discretionary spending and lenient government regulations, leading casino companies like Wynn Resorts (WYNN - Free Report) , Melco Resorts & Entertainment (MLCO - Free Report) , Penn National Gaming, Inc. (PENN - Free Report) and Las Vegas Sands Corp. (LVS - Free Report) are about to sustain and carry forward their growth story. Moreover, the recent court ruling that allows sports betting at casinos is an added advantage for these companies. Per Eilers & Krejcik Gaming 2017 reports, the legal sports betting market is likely to garner $6.03 billion in revenues annually by 2023. We believe that the scope for casino operators will intensify.

In response to a rapidly evolving and dynamic market, Las Vegas Sands and Melco are capitalizing on the significant cash flow associated with the business. The companies, with a market capitalization of $62.3 billion and $15.1 billion, respectively, sport a Zacks Rank #1 (Strong Buy) and have a Momentum Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s find out which stock is a better pick as of now.

Price Performance and Estimated Earnings & Revenues

Arguably, earnings growth is of the utmost importance for determining a stock’s potential, as surging profit levels indicate solid prospects (and stock price gains). For 2018, Las Vegas Sands’ earnings are expected to grow 21.4%. Moreover, its 2018 year-over-year sales growth is projected at 7.2%. Melco’s 2018 earnings and sales are likely to improve 44.6% and 1.7%, respectively.

Melco’s shares have rallied 25.4% in the past year, outperforming Las Vegas Sands’ gain of 20.1% and the industry’s growth of 14.9%.

Valuation & Debt Ratio

Since the casino stocks are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just its equity, but also the level of debt on a company’s balance sheet. For capital-intensive companies, the EV/EBITDA is a better valuation metric because it is unaffected by the changing capital structures and ignores the effects of noncash expenses on a company’s value. The trailing 12-month EV/EBITDA ratio of Melco is 13.16 while that of Las Vegas Sands is 20.44x. With the industry average being 23.4x, Melco has an edge over Las Vegas Sands.

Since the sector has high financial leverage, the debt-to-asset ratio comes into the picture. This measures the ability of a company to meet its long-term debt. Leisure stocks should ideally have lower debt ratios, implying higher proportion of the company’s assets over the long term. Las Vegas Sands’ debt ratio is 44.9 compared with the industry’s 53.5 and Melco’s 43x.

Return on Equity & Net Margin

Las Vegas Sands delivered a return on equity (ROE) of 36.4% in the trailing 12 months compared with the industry’s gain of 5.5%. Melco’s ROE is 15.1%. This indicates that Las Vegas Sands reinvests more efficiently than Melco.

Traditionally, gross margin for the hospitality companies is comparatively higher as majority of the expenses come from the cost of operations. However, the sector’s profits are not very high, which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 3.7%, while that of Las Vegas Sands and Melco’s is 28.3% and 7.3%, respectively.

Final Thoughts

While Melco’s projected earnings are more promising than Las Vegas Sands’, the latter’s margin and ROE posit a clear win. However, Melco surpasses Las Vegas Sands in terms of valuation, debt and share price appreciation. Please take a look at the following table to compare the two gaming giants on your own.

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