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Gaming Stocks Still a Poor Bet - Barron's

by: SA Editor Eli Hoffmann October 05, 2008 | about stocks: LVS / MGM / WYNN    
Eli Hoffmann

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On November 17, Barron's cover story called casino stocks losing bets. They were right: Since then shares of Las Vegas Sands (LVS), Wynn Resorts (WYNN) and MGM Mirage (MGM) have slid 78%, 45% and 73%, respectively.

Conventional logic says 'sin stocks' often do well in a depressed economy as people increasing look to drown-out their woes. Still, Barron's remains unconvinced gambling stocks are a good bet - due largely to their 70%+ debt-to-capital loads.

CreditSights says MGM is at risk of breaking existing debt covenants as it struggles to fund a $9.3B Las Vegas casino with a Dubai investment partner. LVS needs about $1.2B over the next year to keep up with its debt and construction plans. Similarly, other casinos must continue to raise capital despite today's unfriendly environment, or risk falling behind in staking out their claims in the super-competitive landscape.

The pressure on casinos will relent when the lending freeze thaws and when consumers start spending again, but current signs aren't encouraging. The Chinese government has sought to temper the Macau boom by controlling visits, and revenue growth there has begun to slow from a once-raging pace above 50%.

While resilient during previous recessions, Goldman Sachs analyst Steven Kent thinks "this downturn could be different for gaming" now that 12 states host commercial casinos, vs. just two in 1980. Also, lucrative food, drink and entertainment revenue are likely to remain weak during an economic downturn, even if casino attendance remains strong.

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This article has 10 comments:

  •  
    Oct 05 06:58 PM
    bonds are trading at premium which is a credit sign.
    Reply
  •  
    Oct 05 07:12 PM
    I have to agree with the analysis in the article somewhat. Casinos make money primarily off of hoping that 55% or higher lose within the casinos. Skilled patrons and others similiar aren't a factor. They would just win either way. However in a economic downfall, how could you bring 10,000 dollars to a casino and spend hoping you win. You would hope they invest their money in a financial insittuion, but those aren't bet for fun. Those bets you hope everyone knows what they are doing, you profit by having a good retirement, or make bucks by the stock doing well, retain money by tax-advantaged strategies, and so on. So placing a bet in a stock including casino, at a time like this wouldn't make sense. Their will always be casinos. I just don't think a complete casino sell-off will be a good idea. For instance, If i'm stuck in the moutains, a casino their would be a great idea to go to. If I'm stuck in a hometown, and I need any access money possible, then a casino would be a bad idea. It has nothing to do with sin stocks I think. Because those are relative to what somene's religious and not moral or ethical beliefs. Spending money hoping to earn access money is never unethical or immorral. It's just plain not smart if given the wrong person and the wrong circumstances.
    Reply
  •  
    Oct 05 10:42 PM
    Macao may have short setback to moderate growth. Current fears are overblown. Macao is in the early years of a decade of expansion. Even moreso, the infrastructure consisting of buildings, hotels and a bridge to Hong Kong are still yet to be built. The Chinese government will not kill the golden goose, Melco Crown (MPEL) will surprise to the upside with the opening of City of Dreams (Q2 2009).
    Reply
  •  
    Oct 06 12:34 AM
    Who needs Vegas when we have Wall St.
    Reply
  •  
    Oct 06 08:26 AM
    short casino gaming and long video gaming companies ;)
    Reply
  •  
    Oct 06 09:10 AM
    With the recession and credit crunch, agree casinos are not a good bet. These are high beta stocks and can be exhilirating on the upswing. No fun on the downswing like we are experiencing in the past year. LV Sands went from ipo usd30+ to usd140 in a year, this is super. Then began the downswing from usd140 last year to usd25 now.

    When the right time comes, we can go for a good ride up again. We have to be on the lookout.
    Reply
  •  
    Oct 06 10:24 AM
    No shares available to short in most of these.
    Reply
  •  
    Oct 06 03:57 PM
    I can't say it enough, Always buy good companies low and sell high. LVS, MGM, WYNN and BYD are tremendous buys at these prices. They may and probably will go down more, but in a year or two you will be well rewarded. If you wait until Barron's and all the mutual funds decide it's the right time to get back in, then you are giving up 50% of your profits.
    Reply
  •  
    Oct 06 03:58 PM
    I forgot to sign my name to the last comment.
    Dan Kowkabany
    Reply
  •  
    Oct 21 04:20 PM
    If one is satisfied with a 10% per year average over the next three years, why not buy LVS and IGT (dividend about 3.5%) NOW? They are at about 12-13 dollars a share. It is very hard to believe that they won't be more than $40 three years from now. It is also hard to believe that all the "bad" news isn't already in the stocks.

    What if LVS IS able to get all the credit funding it needs to continue its building?

    What if the recession last two years and the market discounts (anticipates) six months ahead---some believe we have already been in a recession for 6 months.

    The risk/reward makes sense to me. How about you?
    Reply
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