Should You Gamble on Casino Stocks?

If there's a group of companies besides the banks that epitomized the danger of leverage, casino operators might be it. Whether it's Las Vegas, Macau, Louisiana, or elsewhere, gaming companies tend to employ healthy amounts of debt when they build new properties. And boy have they been building.

The problem is that as the economy continues to deteriorate, Vegas vacationers aren't as plentiful and convention-attending corporations are tightening the purse strings. Outside of Vegas the picture isn't too much different. That, combined with mountains of debt, has created big headaches for casinos and their shareholders.

The threat of debt
Thus far, the economic downturn has led to declines in gaming revenue almost unheard of in Las Vegas. And although these declines may appear very moderate from a top-line perspective, the high leverage levels are taking a much bigger bite out of profits. At MGM (NYSE: MGM  ) , for instance, 2008 revenue fell just 6%, but with over $600 million in interest payments, earnings before taxes and impairments plummeted 49%. The top line actually increased for Wynn (Nasdaq: WYNN  ) in 2008, but a growing debt load contributed to a 59% drop in pre-tax, pre-impairment income.

Interest payments have actually overcome Station Casinos, an operator of casinos aimed at Las Vegas locals. That company -- which was the subject of a management buyout back in 2007 that loaded it up with debt -- now may be close to a bankruptcy filing. Meanwhile, Riviera Holdings recently reported a missed interest payment, as did the owners of Hooters Hotel. Trump Entertainment Resorts has already filed for bankruptcy protection.

But even the big boys face headier issues than just falling profits when it comes to their debt. Deteriorating results are putting some operators precariously close to tripping debt covenants -- protections that lenders put in lending agreements to make sure a company can live up to its commitment. At the same time, some casino players have significant amounts of debt due within the next few years. As of Dec. 31, 2008 MGM was looking at over $1 billion due this year and next, and then faces over $6 billion in maturities in 2011.

Make a bet or fold?
In The Motley Fool's CAPS community, it would seem that there are precious few gambling stocks worthy of your hard-earned money. Here's a look at CAPS members' views of the major stocks in the industry:

Company

CAPS Rating
(out of 5)

One-Year Performance

Debt-to-Equity Ratio

International Game Technology (NYSE: IGT  )

****

(70%)

249%

Melco Crown Entertainment (Nasdaq: MPEL  )

****

(69%)

64%

Ameristar Casinos (Nasdaq: ASCA  )

**

(9%)

487%

Boyd Gaming (NYSE: BYD  )

**

(58%)

232%

Las Vegas Sands (NYSE: LVS  )

**

(90%)

221%

MGM

**

(88%)

339%

Penn National Gaming

**

(21%)

119%

Wynn

*

(65%)

270%

Source: Yahoo! Finance; Capital IQ, a division of Standard & Poor's; and CAPS.

The best
It's a pretty bleak-looking group from CAPS members' point of view, but there are a couple of four-star stocks sticking out like surfers at the North Pole. So what are these favorites doing that the rest aren't?

International Game Technology may have a balance sheet that looks like a casino operator, but it's the only name on this list that doesn't own a single gaming establishment. Instead, IGT provides those devilishly tempting machines that populate the floors of the many casinos around the world.

While the company does depend on the level of coinage going into its machines for some of its revenues, IGT benefits from the performance of the entire industry, rather than a specific set of casinos. 

Turning to Melco Crown, it may not be surprising that CAPS members are smiling on its stock. Melco is one of the handful of companies currently licensed to operate casinos in the huge gaming center of Macau. In 2008, the region – once a Portugese colony that was returned to China in 1999 -- reported more gaming revenue than the Las Vegas Strip and Atlantic City, combined.

Melco owns and operates the Crown Macau casino and resort, as well as a smaller casino and a group of clubs that focus on gaming machines, and has managed to do it while keeping its balance sheet from being overloaded with debt. The opportunity at Melco, though, is still very much on the come. It is gearing up to open the City of Dreams later this year, a massive project that it says is "set to become the 'must experience' urban entertainment destination in Macau."

The rest
The CAPS community obviously hasn't taken a very optimistic view of the rest of the casino operators, but I wouldn't wipe them all off your radar. Wynn has a relatively concentrated group of some of the best casinos in Las Vegas and Macau, and while its debt-to-equity ratio looks a lot like its competitors', it has over $1 billion in cash and has kept its interest payments pretty well covered. I also think Wynn could potentially be an acquirer.

Penn National and Boyd Gaming may be two others to keep an eye on. Both companies have significant cash available to them through their balance sheets and undrawn lending commitments, and both have made it clear that they are on the hunt for acquisitions. And with big fellas like MGM potentially selling off major assets, it's a good time to be a buyer.

Mission: CAPS
So where do we go from here? Well, you've got an opinion and we've got CAPS. Why not head over to the CAPS community and let the 130,000 members know how you feel about the big names in gaming? CAPS is absolutely free and just might help you become a better investor.

And if you're curious where I stand on the gaming companies, Wynn Resorts is getting a thumbs-up in my CAPS portfolio. It may not be one of the highest rated on CAPS, but I believe it has some of the best gaming properties and the financial wherewithal to not only survive the downturn, but also potentially be an acquirer.

Further Foolishness:

Melco Crown Entertainment is a Motley Fool Global Gains recommendation. Ameristar Casinos is a Motley Fool Hidden Gems selection. Try either of these Foolish newsletter services free for 30 days. 

Fool contributor Matt Koppenheffer owns no shares of any of the companies mentioned. Check out his CAPS portfolio or connect with Matt on Twitter @KoppTheFool. The Fool's disclosure policy needs some poker-face lessons from Lady Gaga.


Read/Post Comments (10) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2009, at 6:48 PM, jettson12 wrote:

    when ar you goons going to realize that casino stocks WILL go up? You have been bashing them on a daily basis for about a week and they steady climb...why?

    Regardless of debt, these companies are slowly turning a corner. The economy as a whole is turning and people are buying because in 8-10 months these stocks could EASILY triple or quad up to get in the 18-20 buck range.

    When the economy turns these babies will be one of the first sectors to explode and I can't figure out if you are short on them and are desperately trying to cover or you just continue to bash knowing they are close to turning the corner and you want a better entry position...either way, get a freaking life you guys don't know jack!

  • Report this Comment On April 28, 2009, at 11:41 PM, lowtechie1 wrote:

    Actually jettson12, the casino stocks will inch up in a year or two as the economy in THE WORLD, not the USA, turns. But for now, the worst is yet to come in Q2-Q3-Q4 2009 for all casino stocks as the real numbers continue to drop. There isn't an analyst alive who doesn't know the casinos have hit the wall and have to stop deferring the bad news. Like the major banks, they have to report the truth eventually. Here in Vegas, revs are down 50% on the gaming floors, 40-60% of the convention volume is expected to drop off due to cancellations by those who wanted to come to Vegas but can't financially justify it now, and the debts coming due are racking up FAST. LVS just announced they have halted China development and want to sell their brand new mega resorts there to turn loose $1.3 billion in needed capital to stave off BK.......Harrah's is upside down....the Riv is in default.......MGM-Mirage is headed for BK......Kirkorian has lost most of his wealth........Stations is on the brink of collapse.......the Trop is tetering.......the Fountainbleu is almost toast.........Trump just filed BK........Wynn is going to report terrible numbers, he caustions......everyone is giving shows away and the room revs are discounted 25%-50% all over town just to keep the lights on........Reno is nearing collapse of EVERYTHING (no one is visiting)........Vegas is 80% collapsed and bearly breathing. That is why the stocks are down 90%........REALITY.

  • Report this Comment On April 29, 2009, at 3:26 AM, TMFKopp wrote:

    @jettson12

    I think lowtechie1 pretty much covered it -- there really are very major challenges facing the casinos. I may not take quite as dire of a stance as lowtechie, but I'm hardly bullish on the overall sector.

    The funny thing is that the underlying businesses aren't completely failing, but when you take the deterioration of the businesses in conjunction with the debt, you've got a recipe for disaster.

    As I noted in the article, I'm a fan of Wynn. I also think PENN could be an interesting one to watch as it has financial resources and its management team seems ready to pounce on an acquisition only when it's the right property and the right price. I think that's exactly the way to go, and I think they just may get their right property and right price.

    The bottom line is that if you're going to go fishing in the gaming sector, you have to be VERY selective and very careful about who you're betting on.

    Matt

  • Report this Comment On April 29, 2009, at 8:47 AM, RealThing666 wrote:

    @lowtechie1

    you wrote:

    "LVS just announced they have halted China development and want to sell their brand new mega resorts there to turn loose $1.3 billion in needed capital to stave off ", that's NOT correct!

    What the Article said is:

    "Las Vegas Sands Corp. is considering the sale of some of its Macau casino operations under a lease-back arrangement potentially worth $1.3 billion, according to a report Monday in the South China Morning Post citing unidentified sources"

    Very different what what you are writing. As you see S.A. wants to sell the Casino and NOT the Resort.

    Actually i thing it's a smart move to sell a Building thats ~4 Years old for 1.3B$ when it took only ~300M$ to build it. Anyhow they want to lease it back and run the Casino then.

    As i see it, the Article itself tells a quite different story as you are trying to tell here.

    Cheers

  • Report this Comment On April 29, 2009, at 5:17 PM, jettson12 wrote:

    hey good call on the casino stocks and MGM...they will fly tomo.

    cover your shorts.

    thank god people dont listen to you...geez.

  • Report this Comment On April 29, 2009, at 9:32 PM, nuexplore wrote:

    It appears to the general investing public that you have a "har*on against the casino stocks given the number of negative articles which have been published. Ok, how much of a gain in 2009 would, let's say, LVS, have to make in order for you to admit that your short sell agenda was wrong?

  • Report this Comment On May 06, 2009, at 1:54 AM, SiestaGuy wrote:

    Well guys, the last couple days proved most of you to be very wrong. I'm up 153% on MGM since buying on April 20.

  • Report this Comment On May 23, 2009, at 3:10 PM, ikkyu2 wrote:

    No one ever includes KNM in this list of stocks that have to do with the gaming industry. Fact is, they make a lot of the video slots in A.C. and Vegas properties; they're not leveraged to death; and they pay a dividend. And they're managed very conservatively; their CEO founded the company in 1969.

  • Report this Comment On May 23, 2009, at 4:50 PM, catoismymotor wrote:

    I prefer casino stocks to financials because...

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=193213&t=0...

  • Report this Comment On October 27, 2009, at 1:19 PM, xjp83x wrote:

    could you guys really picture LAS VEGAS and CASINOs going down? all of this current mess will eventually be GONE. mark my words. I'm down 20% in my current holdings in one of the biggest casino stocks, and i'm not selling it.

    These type of articles and opinions from analysts are what's killing the prices of these stocks, but not their values.

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