How to Value a Casino Stock
In this post, we're going to take you behind the curtain here at Fool.com.
Yesterday, Matt Koppenheffer wrote the article: Are Casino Stocks Actually Cheap?
Gearing up for this article, he created discounted cash flow (DCF) models for four casino companies: MGM, Wynn, Las Vegas Sands, and Ameristar. It involved around 400 cells of manual input on his part. Of course, if he had written about all the gory details, only the three people that were awake at the end of the article would have been happy.
Likewise, we decided to cut out an entire section dedicated to whether EBITDA is an appropriate proxy for the cash flow or earnings of a casino (Wall Street analysts tend to use the price to EBITDA ratio to value casinos). Matt concluded that in lieu of a full-blown DCF model, a P/E ratio (after you ditch trailing earnings in favor of a normalized earnings figure) is better than a P/EBITDA ratio.
Part of the outtake footage is a great quote from Steve Wynn, founder and CEO of Wynn. Basically, he details how ludicrous EBITDA can be when misused:
We report and talk about these EBITDA numbers with our chest puffed out as far as we can get it as an industry. I suppose it tells you how much money you can afford to pay in interest. But the public needs to understand that the profitability, the real profitability of these businesses are much, much less than these puffy EBITDA numbers. Interest expense is very large. And depreciation, I know office building guys and shopping center guys and apartment guys, they get to spend part of the depreciation. But, believe me, in my 40-year history and in the history of every other gaming company here, Kerkorian would agree with me. We spend depreciation. It is a real expense. And when you take the profitability of a hotel like the Venetian or Wynn or Bellagio or any of us it’s a much smaller number when you subtract depreciation and interest. And amortization. We have to pay back the people who lend us the money eventually. It’s a much smaller number. But I know the Wall Street folks, you all like to talk about EBITDA.
For more Wynn hilariousness, click here.
-Anand (who has been intrigued by MGM and Wynn for a while, but does not own shares)