I am not a gambling man, so when it comes to stock picking, I require a business to generate free cash flow, carry low debt, have a clear strategy for growth, and be well priced. Crown Resorts Ltd (ASX: CWN) appears to tick all those boxes, making it a bet I'm willing to take at today's prices.
A resilient business
Crown is 50.01% owned by James Packer and is Australia's largest owner and operator of resort style casinos. It owns the namesake Crown Entertainment Complex in Melbourne and Perth, and has approval to build another casino in Sydney.
Crown derives 75% of revenues from gaming, whilst hospitality and hotels provide a solid 25% to earnings before interest and taxes (EBIT). It carries debt of $2.6 billion on annual cash flows of $634 million and provides a trailing dividend yield of 3.7% fully franked, giving it robust business credentials.
Crown's driver for growth comes through international expansion with the company signing a joint venture (JV) with Lawrence Ho's Melco International to form Melco Crown Entertainment Ltd. The JV will operate three casinos in Macau and one under development in the Philippines.
Crown also struck a deal with local authorities in Las Vegas in 2014 to open a new Crown Entertainment Complex, which should provide a boost to earnings once it opens in 2018. The expansion has increased Crown's gearing to 47%, but should be manageable based on its resilient earnings.
Trouble in paradise
Recently, gaming authorities in Macau cracked down on casino activity for fear of money-laundering and corruption, resulting in a 37% hit to Melco Crown's earnings as a result of weak gambling activity. The expectation is that earnings will slide 57.6% at the JV level, with Crown expected to offset most of the fall through its other operations and book flat profit growth in the next financial year.
The effect on Crown's share price has been savage, with its shares falling 40% in the space of a month (despite only directly owning 34% in the joint venture).
The odds are in your favour
Despite poor results in Macau, Crown's earnings should recover as tourism becomes Australia's largest export by 2030. By owning and operating three of the biggest entertainment complexes in Australia, Crown will be best placed to capitalise on the upcoming boom.
The foray into America should provide additional earnings support with the U.S. economy expected to grow further, bolstering consumer sentiment (and gambling activity). This should lead to higher gaming and leisure spending and boost Crown's earnings.
Accordingly, the current growth prospects for Crown appear favourable.
Foolish takeaway
I can't predict when earnings will recover in Macau, but Crown's robust domestic operations make it an excellent growth play for the expected tourism boom. With the company undertaking new investments in the U.S. and increasing its stronghold in the Australian market, I believe Crown's share price will rebound strongly once the political issues in Macau pass. Therefore, Crown should definitely be a stock that's on your watch list; after all, the house always wins.
