Some people, they probably can’t be considered investors, will say that investing in the share market is ‘just one big gamble’. While this may be true if your whole portfolio consists of small-cap miners hoping to strike it big with an iron ore body in Africa, Foolish investors will know that by doing the right research, speaking to the right people, and looking at the right numbers, the risk of losing money drops significantly by finding the best companies around.
Foolish investors will always prefer to take a 1-in-20 chance of losing money over the long term, versus a 1-in-a-1,000 gamble on a small miner striking it rich in six months’ time.
So where does this leave us with casino stocks? Everyone knows the house always wins, right? So that should make them a no-brainer in every portfolio!
Not So Fast!
Casino companies, despite first impressions, are about far more than taking money from the gamblers hoping to strike it rich. Casinos are also in some respects property trusts and hotel managers. The major assets of Australia’s two largest listed casino groups, Echo Entertainment Group Ltd (ASX: EGP) and Crown Resorts Ltd (ASX: CWN) are the buildings that contain their casinos, and the hotels that they offer to their guests.
But which is best?
This question is receiving a fair bit of coverage as the business paths of Echo and Crown have diverged somewhat. Crown’s share price is consistently hitting all-time highs, while Echo’s is plumbing all-time lows as part of a steady decline of 45% since 2012.
Crown is investing in a new hotel complex in Perth, updating its flagship Melbourne Casino, building a new luxury complex in Sydney, opening a casino in Sri Lanka, and plans on building new casinos through Asia via its Melco Crown joint venture.
Echo meanwhile has just sold its Townsville Casino and is upgrading its Jupiters Hotel and Casino on the Gold Coast. Additionally, both companies will be vying for the right to build a new casino in Brisbane city in what will likely be a hotly contested battle that is set to be decided in early 2015.
While Crown is broadly considered ‘expensive’ due to its share price jump on the back of its impressive growth pipeline, Echo is now considered “one of the cheapest casinos in the world” on a one-year forward price to earnings basis. Analysts are of the opinion that the new CEO should continue the cost-reduction program and apply more control to capital expenditure.
As a Foolish investor I’m currently stuck in two minds. Crown in my opinion has a superior management team led by the talented James Packer, but is far more expensive, however it also has a huge amount of growth to come in the next five to 10 years. Echo meanwhile, is the cheapest its ever been, is cutting costs to boost profit, and is in prime position to be awarded the licence to build a new casino in Brisbane city. It’s a finely balanced trade-off, but Crown remains my favourite of the two, though I wish I’d bought in at a cheaper price.
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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.
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