Crown Resorts Limited vs Echo Entertainment Group Ltd: Which stock should you pick up?

Is a recent reversal of fortunes for the two casino operators big enough for investors to switch?

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The two biggest casino operators in Australia, Crown Resorts Limited (ASX: CWN) and Echo Entertainment Group Ltd (ASX: EGP) are in a sort of reversal of fortunes recently – one sailing along happily, the other starting to lose its momentum.

Previously, Crown Resorts was going from strength to strength. It had its high performing City of Dreams casino in Macau, it was able to negotiate building a new Sydney casino with the NSW government and entered the tender for building a new integrated resort in Brisbane.

Echo Entertainment seemed headed the other way. The Sydney and Brisbane casino markets are exclusive to Echo, but how much would the company suffer if Crown Resorts could muscle in on them? Earnings were down in FY2013 and its stock steadily slipped from about $4.25 down to around $2.50 a share.

A reversal of fortunes

Now, it’s Crown Resorts that has slumped in share price after its Australian casinos showed sluggish growth and the money-spinning Macau venue was hit by the Chinese government crackdown on excessive consumption at casinos on the gambling resort island. Crown told the market that its trading was down and it was getting “killed” by the VIP punters winning too much at its Australian casinos.

Meanwhile, Echo Entertainment saw a 34% gain in its shares in the last six months, with the price back up to about $3.80. It reported a 27% increase in net profit in FY 2014 and now is giving guidance of similarly strong EBITDA growth for first half FY 2015.  Also, Echo may have gained some traction for the new Brisbane casino tender by teaming up with big Chinese construction and hotel developers. That will split the total development cost, making it cheaper for Echo as well.

Ebb and flow of business

It has been interesting to keep with the stories, but what can investors take away from it?

One thing is that business always ebbs and flows. Another is that you shouldn’t focus on too small of a time period. Because of the recent changes, should you dump one stock for the other? What if things switch again next year? You might have better odds for winning at a roulette table.

I still prefer Crown Resorts for the long term. It may take more years to complete all the developments it has in its pipeline, but it leans more toward bigger growth. One factor investors should keep track of is how Crown will be able to fund so much development. How much free cash flow will each new venue add to the pot to pay for the next?

Echo can raise its earnings further on its existing casinos, but Crown is creating an international integrated resort brand in the world’s biggest casino and gaming markets, so I think Crown Resorts will have a better investment return over the long run.

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

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