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Tickers in this Article: WYNN, MPEL, LVS, MGM, MTN
Venture capitalist and blogger Paul Kedrosky recently returned from his vacation at a top-notch ski resort, raving about the lack of crowds. Americans don't seem to travel that much anymore and they certainly aren't spending freely when they do. His conclusion: Avoid resort stocks at all costs.
Bad news from casinos and resorts seems to be a daily occurrence, as companies struggle to fill their rooms, restaurants and recreational facilities. It's a bloodbath and even veterans like Steve Wynn can't seem to make any headway in this economy. However, price-to-tangible book values per share are looking very attractive and extreme risk takers should like the odds.

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Stocks Trading at or Below Tangible Book Value

Tangible book value pertains to the total remaining assets after subtracting liabilities, goodwill and other intangible assets. This is a good (but imperfect) way to estimate the floor price for a current stock at any given time because, should it liquidate all assets and pay off liabilities, it represents the net cash a company might receive.

MGM Mirage recently suggested it could default on its debt and was looking to modify its senior credit facility. This would help meet its liquidity needs and continue making the interest payments on its $13.3 billion in long-term debt.

Many companies are having difficulty meeting payments, given the severe downturn in revenue. Another player in gambling circles, Las Vegas Sands, needed to raise an additional $2.1 billion in capital in November to meet its operating needs - even with founder Sheldon Adelson throwing in $475 million of his own cash a month earlier. He likely wouldn't have done this if he had known that the business was in such serious trouble.

The same goes for American billionaire and famed Las Vegas developer Kirk Kerkorian; I can't imagine he'd let his baby die a premature death, especially since his majority ownership has shrunk from $9.6 billion, one year ago, to $390 million today. (For further reading on book value, read our related article Digging Into Book Value.)
Market Cap
Price-to-Tangible Book Value Per Share
Wynn Resorts
$2.1 billion
1.38 times
Melco Crown Entertainment
$1.3 billion
3.38 times
Las Vegas Sands
$1 billion
0.21 times
MGM Mirage
$786.6 million
0.21 times
Vail Resorts
$681.5 million
1.36 times
What's the Going Rate?
The big question in Las Vegas these days is what kind of payoff can a casino operator expect when selling out? Generally, a buyer would make an offer based on a multiple of the operator's future estimated earnings which, in this market, is difficult to know.

CB Richard Ellis analyst Jacob Oberman says, "What happened last year isn't indicative of the future. It's going to be difficult (for buyers and sellers) to agree on price."

Recently, MGM Mirage sold its Treasure Island casino for $775 million - or seven times its most recent 12-month earnings. Some analysts suggest MGM Mirage could fetch upwards of $3 billion for Steve Wynn's old haunt, the Bellagio. That too would be approximately seven times earnings. However, the negotiations on any sale will be fierce. That brings me back to tangible book value per share.

No Guts, No Glory
Earnings for the six stocks will drop an average of 76% in 2009 (excluding analysts' 1900% estimated drop for Melco Crown Entertainment), but should be making money by 2010. MGM Mirage and Las Vegas Sands both are trading at one-fifth of their tangible book values per share. Their businesses, however, are too leveraged for my tastes, so I'll pass.

The next two lowest in terms of price-to-tangible book value per share are Vail Resorts and Wynn Resorts. Although the ski business is lucrative in terms of real estate development, now is not the time to hitch your wagon to the kind of speculation investing in Vail might involve.

If the 2010 Olympics aren't a success for Intrawest's Whistler-Blackcomb resort, Vail might be able to pick up some assets on the cheap. I'd keep an eye on it as we get closer to the games.

Bottom Line
The combination of an experienced leader (Steve Wynn) and great properties producing decent profits over the next two years makes Wynn Resorts' value proposition a gamble worth taking.

To learn more about investing in Vegas, read A Prelude To Sinful Investing.

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