“Over the last year, returns on invested capital (ROIC) and value spreads (ROIC-weighted average cost of capital, WACC) increased for most of the gaming operators and lodging companies in our coverage universe, after posting declines during the prior two years.
For the gaming operators, ROICs and spreads suffered in 2008 and 2009, before rebounding in 2010, as invested capital (capex) increased for many operators and much greater volatility (beta) increased the theoretical cost of equity. For lodging companies, ROICs and value spreads also hit a trough in 2009 and 2010, after peaking in 2006 to 2007.
As we look toward 2012, the Asia/Macau-based operators ( Wynn Resorts (ticker: WYNN), Las Vegas Sands (LVS) and Melco Crown Entertainment (MPEL) should generate ROICs in 2011 and/or 2012 that exceed prior peaks given recent Macau strength and meaningful free-cash-flow generation. In our view, this should help to maintain current enterprise value/earnings before interest, taxes, depreciation and amortization (EV/Ebitda) valuations.”Comments »