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Crown, Echo Entertainment and Skycity Entertainment: 3 casino stocks to watch

Crown (ASX: CWN) has been moving this year to expand its City of Dreams brand for integrated resorts and casinos. Its Macau casino, owned through Melco Crown, a joint venture between Crown and Melco International, was the first of its casinos overseas, and currently it is developing another in the Philippines that it is set to be open in mid-2014.

As an investment the Macau casino has paid off in spades with its latest valuation standing at $6.2 billion against the initial $600 million invested in the development. The plan is to expand to other Asian capitals to replicate the success it is enjoying now. Next is Sri Lanka, where the company is in negotiations with the government over developing a casino complex estimated to cost $400 million.

It hasn’t taken its eyes off the domestic market here, either. It is building a six-star hotel in Perth due to open in 2016, and with the Queensland government planning to offer three new casino licences in the state, the next target is constructing a new integrated resort in the Brisbane CBD, which already has The Treasury Casino, operated by Echo Entertainment (ASX: EGP).

Other casino opportunities could be opened up in the Gold Coast and Cairns, but Crown has expressed interest in creating a new complex only in Brisbane. No doubt Echo Entertainment will be under pressure to upgrade its casino there and the Jupiters Casino in the Gold Coast to hold off competition once its exclusive rights expire.

Echo Entertainment  is proposing a $1.6 billion remodelling and upgrading project for the two casinos, and is waiting on state approvals. Its Brisbane casino is in a heritage listed building, so it is offering to exchange the building site for nearby real estate that will be put up for sale by the state government. Crown is vying for the same site.

In a recent development, Echo Entertainment has put its Townsville casino up for sale for $75 million. Although Crown may not be interested in acquiring it, it may attract attention from Skycity Entertainment (ASX: SKC). The north QLD casino had a little under $10 million in earnings before interest, tax, depreciation and amortisation, so on valuation terms that would give it a price-to-earnings ratio of more than 7.5.

Foolish takeaway

Like the casino business itself, the glitz and glamour can be exciting, but you as an investor have to look at the reports, revenue and earnings figures to see if these stocks fit within your portfolio.

Rather than taking a gamble, you want rock solid growth and a durable competitive advantage in the stocks you buy. Make sure it isn’t only the house that always wins.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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