The Motley Fool

Should Investors Gamble on These 3 Gaming Stocks?

Around the world, gambling is a huge business.

In 2012, gamblers wagered more than $130 billion in casinos around the world, and that’s not even including the billions wagered in underground games and via bookies in places where gambling has been prohibited. Areas such as Las Vegas and Atlantic City have always been gaming hotspots, but the United States is quickly losing its title as the leading gambling hotspot to Asia, where casinos are being built at the fastest rate in the world.

Online gaming is growing significantly as well. Currently, Canadians can set up accounts with offshore, online-only casinos without much difficulty. The United States has banned its citizens from doing the same, mostly in an attempt to protect the interests of the gambling industry within its borders. Observers believe the U.S. will soften its stance on this type of gaming once it figures out how to tax its share of the revenues.

With worldwide gaming revenues expected to grow 8-10% over the next few years, gambling is poised to be a solid growth sector going forward. Here are three ways investors can share in its success.

1. Great Canadian Gaming

Great Canadian Gaming (TSX: GC) owns 17 gaming properties across Canada and Washington State. The company focuses on investing in areas with high barriers to entry, meaning its casinos are protected by the artificial scarcity created by government. Essentially, the government limits its competition by not doling out additional casino licenses.

Even though the company is in this enviable position, it hasn’t really translated to consistent results. Earnings hovered around the 30-cent mark (before extraordinary items) from 2010 to 2012, finally spiking to more than 60 cents per share in 2013. Analysts are expecting 77 cents per share in earnings this year, but have an average price target right around the stock’s current level.

One positive for investors of Great Canadian Gaming is its aggressive share buyback program. It eliminated about 20% of shares outstanding over the last three years, and recently announced plans to buy back another 4.2 million shares in 2014. This represents about 6% of total outstanding shares. A company this aggressive in buying back shares is rare, and further adds to the bullish case for the company’s remaining shares.

2. Amaya Gaming

Investors who believe that online gaming is the next big growth area in the industry should look at Amaya Gaming (TSX: AYA), which creates and maintains the software that powers many of the leaders in the space.

Essentially, Amaya is a play on the United States government approving online gaming. Two states, New Jersey and Nevada, have approved online gaming in a limited form. There are currently seven online casinos catering to New Jersey gamblers, and Amaya supplies the software to six of them. It’s also big with many online casinos that are headquartered in Europe.*

In the meantime, Amaya acquired Cadillac Jack, a maker of electronic slot machines, for $177 million. This provides a nice steady business for the company while it waits for other jurisdictions to open up online gambling.

Las Vegas Sands

Besides owning The Palazzo and The Venetian on the Las Vegas Strip, Las Vegas Sands (NYSE: LVS) also owns a handful of properties in Macau, the fastest growing gaming destination on the planet.

Asian results have been terrific, as the company grew revenue 23% and net income 57% compared to 2012. As more Chinese consumers become affluent enough to afford a holiday to China’s only gambling destination, results should continue to impress.

Investors aren’t really paying a high price for this growth either. The stock is trading at 26 times trailing earnings, but analysts expect earnings to increase in 2014, putting the stock at just 20 times forward earnings. Investors are also treated to a 2.5% dividend.

Foolish bottom line

Gaming is expected to be a strong business over the foreseeable future. As gaming revenues increase, so will opportunities for each of these companies to grow market share. Each of these companies will continue to do well as the size of the gambling pie continues to increase. These gaming stocks could represent a good bet for your portfolio.

* – an earlier version of this article indicated that the online casinos were headquartered in the Caribbean. Amaya notified us that this is incorrect and in fact these online casinos are European headquartered.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stock mentioned in this article. 

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