Updated on December 18th, 2020 by Aristofanis Papadatos

Casino Stock Prices
Casino Stocks To Watch Right Now
Casino Stocks To Watch Now

May 27, 2020 Penn National Gaming (NYSE: PENN) isn’t your classic casino developer such as the companies above. Overall, it’s one of the most unique casino stocks available today. Yes, Penn does own and operate casinos across the United States. However, it also runs horse racing tracks and purchased a 36% stake in Barstool Sports for $163 million. Jan 03, 2020 Casino stocks are always on the house. That's according to savvy investors who have been monitoring the performance of casino stocks over the years. Top-performing casinos are gearing up to reward investors with handsome dividends in the near future. For example, Wynn Resorts Ltd (WYNN).

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.

Top Casino Stock #4: Wynn Resorts (WYNN)

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 retur

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