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​Doubling down on gaming stocks

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The usually flamboyant gaming stocks weren't exuberant performers last year, but they're displaying some flash in 2016, particularly the shares of MGM Resorts International (MGM) and Wynn Resorts (WYNN). They've been trending higher since January, with MGM jumping to $22 a share from $16.56. Wynn did even better, leaping to $96 from $51.

Not surprisingly, Wall Street has turned upbeat not only on MGM and Wynn but on most other gaming stocks, as well. MGM, a global hospitality company, operates a number of destination resort brands, including Bellagio, Mandalay Bay, Mirage and MGM Grand. Of the 20 major industry analysts who follow MGM, five rate its stock a "strong buy," 23 recommend it as a "buy," and two have it as a "hold." None rates MGM a "sell."

Wynn owns and operates the gaming facilities Wynn Las Vegas and Encore in Las Vegas. And in Macau, the company operates under a 25-year concession agreement with the Chinese government. Its Wynn Macau, opened in 2006, includes a hotel with 600 rooms and about 100,000 sq. ft. of gaming space, plus seven restaurants and other facilities. Of the 19 major Street analysts who track Wynn, one rates the stock a "strong buy," eight recommend it as a "buy," and 10 rank it a "hold." No analyst rates Wynn a sell.

A part of the renewed vigor of gaming companies is the strengthening Las Vegas economy. The resurgence of gaming stocks is "hard to ignore," said Thomas Allen, equity analyst at Morgan Stanley, who rates MGM as "overweight" with a price target of $29 a share. (Morgan Stanley has done business with MGM).

MGM's cross-selling ability and positioning "across the price spectrum allows it to benefit from multiple trends," he noted. That has resulted in Wynn's Bellagio hotel generating the highest EBITDA (earnings before interest, taxes, depreciation and amortization) in Las Vegas in the first quarter of 2016.

Part of Allen's optimism is MGM's $300 million growth plan, which, he noted, is "tracking ahead of schedule and could be a significant tailwind." Various precedents "suggest a clear pattern of stock outperformance where announced plans have driven a visible acceleration in profit growth," he said in a recent note to clients.

Equity analyst Tuna N. Amobi of S&P Global Market Intelligence, has upgraded his rating on MGM to a "strong buy" from "buy" and also increased his one-month price target for the stock by $2 a share, to $26. And he hiked his projected 2016 earnings estimate by 8 cents a share, to 73 cents. For 2017, Amobi expects earnings of $1.03 a share, way up from 2015's adjusted "normalized earnings" of 58 cents.

Despite "some apparent challenges in China, we note a relatively healthy improvement and a sizable margin expansion at the domestic resorts," said Amobi.

In sum, "we view MGM as well positioned to further benefit from favorable supply/demand dynamics in Las Vegas (and its convention business), while on track with its Profit Growth Plan." With a planned opening of MGM's Cotai Resort in Macau in the first quarter of 2017, the company also would benefit from an eventual recovery in the Chinese gaming market, noted Amobi.

When it comes to Wynn, one of the bulls on its stock is Goldman Sachs, which rates it a "buy." "Wynn is fundamentally one of the highest-quality operators in gaming," since it has been consistently leading the sector with "best-in-class properties," said Steven Kent, equity analyst at Goldman Sachs. (Goldman has done business with Wynn). He recently raised his price target on the stock to $103 a share from $78. Kent noted that Wynn targets high-end players, which allows it to be less dependent on local market strength.

Wynn continues to enjoy "attractive margins and returns," in part due to improvement in certain travel, retail and leisure trends in both Macau and the rest of China, according to the analyst. He also expects the company to benefit from the opening of Wynn Palace, a premier Cotai resort.

Dan Wasiolek, equity analyst at Morningstar, who rates Wynn a "buy," has a fair value estimate on the stock of $136 a share, based on potential added benefits from Wynn's various projects, including the Paradise Park project in Las Vegas, which he expects will cost $1.6 billion, with $250 million in annual EBITDA starting in 2020.

Wynn has some of the major institutional investors as shareholders, led by Vanguard Group, which owns a 6.99 percent stake, and State Street, which owns 3.19 percent. Capital International Investors is also a big stakeholder, with 3.06 percent.

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