The casino market, which is considered one of the largest entertainment markets in the world, is positioned for substantial growth in the long term. Per a report by Research and Markets, the casino gaming market in the United States is expected to see a compound annual growth rate (CAGR) of 4.74% in the 2017-2021 period.

Leading casino companies like Wynn Resorts WYNN, Melco Resorts & Entertainment MLCO, Penn National Gaming, Inc. PENN and Las Vegas Sands Corp. LVS have been looking up on improving tourism in Las Vegas and increasing demand for gaming and leisure.

These casinos are opting for alternative avenues to expand customer base and business. They are increasingly making associations with the hospitality sector, setting up luxury hotels alongside their gaming businesses. Since these non-gaming services generate higher margins, companies are increasingly focusing on alternative streams to drive revenues.

Wynn Resorts and Melco Resorts have been responding to the rapidly evolving market and have capitalized on significant cash flow associated with the casino business. The companies, with a respective market capitalization of $16.96 billion and $13.06 billion, carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s find out which stock is a better pick for now.

Price Performance

While both the stocks outperformed the industry’s gain of 30.9% over the past year, Wynn Resorts’ gain of 83.5% has handily outpaced Melco ‘s 57.1%.

Estimated Earnings & Revenues

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels indicate solid prospects (and stock price gains).

For 2018, Wynn Resort’s earnings are expected to grow 24.8%. Moreover, year-over-year sales growth for the year is projected at 4.9%. Melco’s 2018 earnings and sales are likely to improve 19.8% and 2.5%, respectively. This lends Wynn Resorts an edge over Melco as well.

Valuation

Since casino stocks are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account the level of debt on a company’s balance sheet, not just its equity. For capital-intensive companies like Wynn Resorts and Melco, the EV/EBITDA is a better valuation metric because it is unaffected by changing capital structures. It also ignores the effects of noncash expenses on a company’s value.

Wynn Resorts’ valuation looks a bit stretched when compared with the industry average. Looking at the company’s EV/EBITDA multiple, investors might not want to pay any further premium. The company currently has a trailing 12-month EV/EBITDA ratio of 16.6 which makes it overvalued compared with its peers as the industry current average EV/EBITDA is 13.5x. However, Melco’s valuation records 11.3x when compared with the industry. Melco is at an advantage when the companies’ valuation is considered.

Return on Equity

Wynn Resorts delivered a return on equity (ROE) of 133% in the trailing 12 months compared with the industry’s gain of 5.9%. Melco’s ROE is pegged at 12.2%. This indicates that Wynn Resorts reinvests more efficiently than Melco.

Debt Ratio

Since the sector has high financial leverage, the debt-to-asset ratio comes into the picture. This measures the ability of a company to service long-term debt. Hospitality stocks should ideally have lower debt ratios, implying higher proportion of the company’s assets over the long term.

We note that Wynn Resorts is in a disadvantageous position as it has high debt ratio when compared with the industry and Melco. Wynn Resorts’ debt ratio is 81.9 compared with the industry’s 48 and Melco’s 44.3x.

Wynn Resorts’ heavy reliance on debt financing remains a concern. As of the last reported quarter, total debt outstanding was $10.18 billion. Owing to a higher debt burden, the company may face difficulty in financing its upcoming projects. Moreover, any downturn in the macroeconomic and credit market conditions is likely to make it difficult for the company to pay or refinance debt.

Net Margin

Traditionally, gross margin for hospitality companies is comparatively higher as majority of the expenses come from cost of operations. However, the sector’s profits are not very high which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 1.7%, while that for Wynn Resorts and Melco are 6.2% and 5.9%, respectively.

While both the companies exhibit substantial cost savings to drive margins, Wynn Resorts’ solid business model lends it a competitive edge.

Final Thoughts

While Wynn Resorts (WYNN) clearly overshadows Melco (MLCO) in terms of price movement, projected EPS growth, ROE and margins, the latter has an edge when it comes to valuation and debt ratio.

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Las Vegas Sands Corp. (LVS): Free Stock Analysis Report
 
Wynn Resorts, Limited (WYNN): Free Stock Analysis Report
 
Penn National Gaming, Inc. (PENN): Free Stock Analysis Report
 
Melco Crown Entertainment Limited (MLCO): Free Stock Analysis Report
 
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