The Great Casino Divide - Monday 21st of January 2013

Las Vegas has long been synonymous with gambling and its mega-hotel/casinos have long dominated the gaming market.

But as other regions expand their presence in the sector, and Nevada continues a fitful recovery from the economic downturn, casino operators are deriving an increasingly smaller proportion of their revenue from Sin City.

Granted, Nevada and the Las Vegas strip reported their first monthly gain in revenue in nearly two years in November, but the area will not truly recover until the convention business bounces back. Currently, convention business is down 25% for the year.

As Jane Pedreira, analyst at Clear Sights Research, says: "Las Vegas is still symbolic of the industry, but in terms of revenue its not as important."

So if what happens in Vegas -- to borrow a phrase -- no longer matters as much, what does this mean for investors? And where, instead, should investors be looking?

MACAU GOES ALL IN

We begin with a look at the numbers. For the most recent month on record, the burgeoning gambling enclave of Macau, China, posted gaming revenue of $1.42 billion, compared with $873.2 million for all of Nevada and $473.8 million for the Las Vegas strip. Macau, in fact, has surpassed Las Vegas in gaming revenue since 2006.

Consider that two of the biggest U.S public casino operators -- Las Vegas Sands (LVS_) and Wynn Resorts (WYNN_) -- garner more than half of their revenue today from Macau. Sands derived 73% of its earnings from the Chinese enclave in 2009, while Wynn pocketed 65% of its revenue from there, according to J.P. Morgan estimates.

"We expect the Macau-centric stocks to continue to work, given the significant growth prospects in the market and the potential upside to Street revenue and [earnings] estimates," J.P. Morgan analyst Joseph Greff wrote in a note.

Greff is predicting 20% growth in Macau profit in 2010.

Sands and Wynn, for the part, are taking full advantage of this prospect, completing initial public offerings of their Macau assets last year to raise $4.13 billion combined on the Hong Kong stock exchange.

This has prompted rival MGM Mirage (MGM_) to move forward with its Macau IPO. Last week it was reported that the company is currently in the process of securing investment bankers to work on the offering.

MGM, though, derived just 2% of its earnings come from Macua in 2009, according to J.P. Morgan estimates -- and is the only company out of the eight tracked by the financial institution that had more than half its revenue (74%) come from the Las Vegas strip.

Its stock has underperformed as a result, as investors look for companies that are not as dependant on the strip, says Chris Jones, analyst at Telsey Advisory Group. Shares of MGM were off 41% at the end of 2009, while Sands and Wynn were up 111% and 23%, respectively.

Still, Macau is not a completely carefree investment. "I think [people] are too focused on the area and not worried enough about possible visa regulations and growing competition," Dennis Forst, analyst at KeyBanc Capital Markets says.

The $5 billion Resort World Sentosa, built by Gentry Singapore, opened 1,340 rooms in four hotels. A Univeral Studios theme park is scheduled to launch next month, and Las Vegas Sands plans to open its Marina Bay Sands in May.

STATES PUT SKIN IN THE GAME

Back in the contiguous 48 states, regional gaming is also making headwinds, garnering interest for smaller companies like Penn National Gaming (PENN_), Ameristar Casinos (ASCA_)and Isle of Capri Casinos (ISLE_).

Pennsylvania, for one, has been a controversial focal point after it approved putting table games in casinos earlier this month. While Penn and Sands are the only public companies with operations in the state -- which generated just $155 million in revenue in Decembe -- there are talks that two more casino properties could open in Philadelphia.

Delaware will soon incorporate tables in its casinos, while West Virginia recently won the approval to do the same. A similar bill is pending in Ohio.

Investors are also waiting on Massachusetts, which might legalize gaming as early as this year. If approved, the state could well attract interest from Vegas firms like Wynn and Sands, Jones says.

Maryland received approval for slot machines back in 2008.

STATES PUT SKIN IN THE GAME

Back in the contiguous 48 states, regional gaming is also making headwinds, garnering interest for smaller companies like Penn National Gaming (PENN), Ameristar Casinos (ASCA)and Isle of Capri Casinos (ISLE).

Pennsylvania, for one, has been a controversial focal point after it approved putting table games in casinos earlier this month. While Penn and Sands are the only public companies with operations in the state -- which generated just $155 million in revenue in Decembe -- there are talks that two more casino properties could open in Philadelphia.

Delaware will soon incorporate tables in its casinos, while West Virginia recently won the approval to do the same. A similar bill is pending in Ohio.

Investors are also waiting on Massachusetts, which might legalize gaming as early as this year. If approved, the state could well attract interest from Vegas firms like Wynn and Sands, Jones says.

Maryland received approval for slot machines back in 2008.

As states across the nation begin dismantling decades-long statutes against gaming, the race is on for companies willing to broaden their horizons beyond the borders of Sin City. "The market cap of Las Vegas Sands and MGM drive valuation, but if you add the market cap [of all the public companies ] together you will see there is still a lot of value in other parts of the U.S., not just Vegas," Pedreira says.

Indeed, Pedreira estimates total gaming revenue to be about $61 billion, with $10 billion coming from Vegas and Nevada and $24 billion coming from all other states, excluding Indian Reservations and Connecticut. On this basis, Nevada would comprise a mere 16% of the total industry.

None of which means that Las Vegas is irrelevant; those companies on the strip will continue to represent sizable investing dollars.

"It is still the epicenter of the gaming world. Its infrastructure is un-replicable, even in Macau," Forst says. "Atlantic City opened in the 1970s and claims were made that people from the east wouldnt go to Vegas, but that didnt happen. Las Vegas will remain the No. 1 gambling market."

But in investing -- as in gambling -- its rarely a bad bet to play the hot hand.

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