Deutsche is gambling that $140 oil and a weak economy won’t hobble casino stocks Las Vegas Sands (LVS), MGM (MGM), or Wynn Resorts (WYNN) for much longer. In fact, they see nearly 100% returns for each.
Let’s begin with the risks that have persuaded investors to run away screaming:
Derivative issues include gasoline prices, food costs, jet fuel (Vegas air capacity reduction and higher fares), heating oil (forthcoming winter issue), and consumers’ discretionary spend. Higher U.S. unemployment, tight credit markets (development pipeline funding and ROIC concern), illiquidity and/or downward pressure on housing (condo‐hotel monetization concern), and utility costs impacting margins are all exacerbating oil’s impact on casino sentiment.
But it’s these very risks that investors are overestimating, Deutsche says, and that’s making the casino stocks extremely undervalued:
Our conclusion is that the market is seemingly over‐discounting the risk[s], especially when looking at recent Vegas data, which is down less than anticipated (YTD gaming revs – 2.6%)….
MGM shares are down 31% since March. Since then, we (as proxy for consensus) have lowered our 2009 MGM Vegas EBITDA estimates, resulting in a consolidated company‐wide estimate revision of about 7%…we think the Street could be looking for a negative 30% revision to EBITDA estimates for MGM’s Las Vegas properties [more than 4x as large as our expected revision].
Translation: the Street is thinking estimates will be slashed, and they won’t.
Deutsche reiterates BUY on Las Vegas Sands (LVS), target price $94; MGM (MGM), target price $74; and WYNN Resorts (WYNN), target price $160.
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