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Avoid Gaming ETF on Subdued Casino Earnings? - ETF News And Commentary

Casino operators seem to be running out of luck this year thanks to the sluggish Macau business. Notably, Macau - a Chinese territory - is one of the largest casino gaming destinations in the world.

After a long run, Macau has started to lose its charm on credit crunch issues in mainland China, check on illegal money transfers especially in VIP gaming from mainland China to Macau, constraints on visa and last but not the least, a broad-based slowdown in China (read: Will Troubles in Macau Spoil Gaming ETF Investments? ).

Per Reuters , October was possibly the most appalling month for Macau casino revenues as analysts estimate gambling revenues to have declined in the range of 20-23% year over year. If this really happened, this would be the deepest plunge on record.

Quite expectedly, this negative vibe will spread into the corporate earnings front. For many companies, the growth rate in the region was lower than in Las Vegas as the latter is improving in a slow-but-steady pace (read: Will the Gaming ETF Soar if Japan Approves Gambling? ).

Mixed Earnings

MGM Resorts posted third-quarter 2014 loss of 2 cents per share on October 30 after the closing bell. Earnings missed the Zacks Consensus Estimate of 6 cents by 75% and year-ago earnings of 2 cents. After posting profits consistently since the beginning of 2013, this unexpected loss emanated from a decline in casino revenues in the domestic market and a lower number of VIP gamblers in the Macau market.

Revenues nudged up 1% to $2.49 billon and beat the Zacks Consensus Estimate of $2.48 billion. Higher revenues from mass market gaming in China could have led to the upside. Probably thanks to the revenue beat, MGM shares were up about 1.2% as of October 31 (read: Sluggish Macau Market and Muted Earnings Hurt Gaming ETF ).

Another casino operator, Wynn Resorts Ltd. ( WYNN ), posted relatively better third-quarter 2014 results with earnings and revenues beating the Zacks Consensus Estimate. The company also hiked its quarterly dividend by 20%.

Its adjusted earnings of $1.95 in the third quarter grew 6% from the year-ago quarter and comfortably beat the Zacks Consensus Estimate of $1.82 by 7.1% as a strong Las Vegas market made up for the sluggish environment experienced in Macau.

Revenues of $1.37 billion beat the Zacks Consensus Estimate of $1.36 billion by 1%, possibly due to the strength experienced in the Las Vegas market. However, revenues were down 1.4% year over year hurt by the sluggish Macau segment. Since reporting earnings on October 28, shares were up about 2.6% (as of October 31).

Yet another company, Las Vegas Sands Corp. ( LVS ) reported in-line third-quarter 2014 earnings on October 15. Advancement in mass market gambling and the non-gaming segment partly compensated for the effect of a decline in VIP gambling. However, revenues of $3.53 billion missed the Zacks Consensus Estimate of $3.67 billion by 3.8% and declined 1% year over year. Gross gaming revenues in Macau had declined in all the three months of the quarter. Since reporting earnings, shares gained about 3.2% as of October 31.

ETF Impact

The casino gaming ETF - Market Vectors Gaming ETF ( BJK ) - was also hurt by this muted sentiment. All three companies mentioned above have found a place in the top 10 holdings of the fund with a considerable share, and we have taken a closer look at some of the details for this fund below:

BJK in Focus

The fund looks to track the Market Vectors Global Gaming Index and provides investors a direct exposure to the casino gaming market. The fund has so far attracted $44.8 million in assets and invested it in 47 holdings. The product is expensive as it charges 65 bps in fees per year which is on the higher end of the expense ratios prevailing in consumer discretionary ETF space.

All the three abovementioned companies have created a place in the top-10 holdings of the fund with a considerable share. Both companies - Sands China and Las Vegas Sands - have about 15% exposure in BJK.MGM China holdings has about 5.40% weight in the fund. Wynn Macau (3.44%) and Wynn Resorts Ltd (7.08%) also accounted for more than 10% of BJK.

The fund has plunged 14.6% this year. It currently has a Zacks ETF Rank #5 (Strong Sell) with a Medium risk outlook and if recent trends in Macau are any guide, we could see more selling pressure in the months ahead too (read: ETFs Slipping to Rank #5 this Earnings Season ).

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MKT-VEC-GAMING (BJK): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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