The gambling industry is a sector that has shown spectacular growth. My colleague Rob Belanger and I recently took a look at the industry.
We only included companies of more than $1-billion (U.S.) in market capitalization, and we sorted them based on revenue.
EV/EBITDA (enterprise value divided by the earnings before interest, taxes, depreciation and amortization) is used to determine the value of a company. This metric takes debt into account where other value measures, such as the price-earnings ratio, do not. A low EV/EBITDA indicates a company could be undervalued.
What did we find?
According to Forbes magazine, Macau, on China’s west coast, surpassed Las Vegas several years ago as the largest gambling market worldwide. Macau took in $38-billion in gambling revenue in 2012, so gambling companies need to have a presence there or risk being left behind. Wells Fargo is predicting as much as 20-per-cent annual growth for Macau casinos through 2018.
Caesars World’s share price has climbed almost 259 per cent in the 12 months to Dec. 19 but is still one of the most undervalued among its peers, according to our EV/EBITDA metric. It also has the most tables and slot machines of the companies listed.
Las Vegas Sands has the highest sales growth in part because of Sands China, the company’s 70-per-cent-owned Macau subsidiary. According to Forbes, the Sands’ Macau properties generate an average of a little over $16,000 per day per table.
The most undervalued company, based on the EV/EBITDA, is Penn National Gaming. Penn focuses on slot machines in 26 North American facilities, including Casino Rama north of Toronto.
The largest company on our screen, in terms of revenue and market share, is SJM Holdings. It is the only company that has its roots in Macau.
Neither Galaxy Entertainment Group, nor Genting Malaysia Bhd, publishes the number of tables or slot machines.
Investors would be well advised to conduct further research or contact a professional before investing.
Gaming stocks screen
Figures as of Dec. 19, 2013. All currencies in US$. Source: Bloomberg and Wickham Investment Counsel Inc.