Gaming Stocks

The sector is up on news that New Jersey has become the largest state to approve online gambling.

(Barrons WEDNESDAY, FEBRUARY 27, 2013)

Some gaming stocks were dealt a winning hand Tuesday, as Internet gambling will now be allowed in New Jersey. 

However, it would be premature to buy aggressively given weak earnings projections for many of the public, U.S.-focused casino and gaming operators. Moreover, a national law would be needed before Internet poker and other games materially boosted profits for the sector. And that could take a long time.

That said, the federal government has changed colors in the online gambling debate, resulting in more state lottery ticket sales online. But even if more states adopt Internet gaming, that may not mask the struggles of an industry burdened with costly destination casinos and slack demand.

Boyd Gaming (ticker: BYD) and Caesars Entertainment (CZR) have been losing money. Analyst projections show that bleeding is likely to continue for Caesars.

Shares of Boyd, which has a market capitalization of $580 million, rose 21 cents, or 3.2%, to $6.71 in midday trading, while shares of Caesars, were up 35 cents, or 2.9%, to $12.48. Caesars has a market value of $1.5 billion, but its shares are more thinly traded.

Boyd reported a loss in 2012 but is expected to earn 45 cents per share in 2013 and then grow earnings per share by 40% in 2014, according to Thomson Reuters data. Boyd breaks down its revenue by geography, unlike many other operators, and that highlights its exposure in New Jersey. Boyd gets roughly a third of its business from Atlantic City, but it also derives another third in the Midwest and Southern states, and 36% in Las Vegas—with 26 percentage points of that revenue local business and 10 points concentrated in downtown Las Vegas.

Boyd is expected to boost 2014 revenue by a mere 1%. Goldman Sachs recently downgraded Boyd to Sell, based on three underlying issues. 

Caesars, which also operates casino-entertainment facilities, is expected to bleed money into 2014, albeit to a lessening degree: From a loss of $11.95 per share in 2012, analysts are projecting a loss of $6.06 per share in 2013, and $4.58 per share in 2014. Caesars is concentrated in Las Vegas but has operations in Atlantic City and elsewhere.

Conversely, for Wynn Resorts (WYNN), Macau and high rollers from China have boosted returns. Macau accounts for 28% of Wynn revenue and has augmented Wynn's casino profits in Las Vegas, which accounts for the rest of revenue, according to Thomson Reuters.

Shares of Wynn gained $1.65, or 1.7%, to $117.15 Wednesday.

Wynn looks like the best of the bunch. It is trading at a rich but not too steep valuation given its considerable heft—a market value of $11.7 billion—and its growth prospects in the industry. Shares are trading at 19.3 times estimated earnings for 2013 of $6.04 per share. Wynn's earnings are expected to increase nearly 13% this year and 12% next year. The stock is well off its 52-week high.

MGM Resorts International (MGM), which operates casino complexes, lost 69 cents per share in 2012. It is expected to trim its losses to 29 cents per share in 2013, and approach break-even in 2014 on revenue growth of about 4%. MGM shares were recently up 30 cents, or 2.4%, to $12.40.

Some gambling and entertainment assets may be better off in real-estate investment trusts (see Barron's Take, "Penn National Gaming Hits Jackpot," Nov. 16, 2012).

Ultimately Internet gambling could save the day, but for now, that doesn't look likely unless the federal government approves fast and sweeping legislation.