Battered Budgets May Bolster Bettors

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The daily double of state budget shortfalls and politicians fearing tax increases appears to be good news for racetrack companies like MTR Gaming (Nasdaq: MNTG  ) and Penn National Gaming (Nasdaq: PENN  ) .

On Friday, Ohio's governor Ted Strickland and leaders of the state legislature agreed to a budget deficit-reduction plan, including a provision that lets the governor and legislature approve slot machines at racetracks without putting the matter before voters.

The agreement, which must be ratified by Tuesday, illustrates the revenue desperation of states -- and the opportunity for gambling companies to capitalize.

If the Ohio deal is sealed and if other states endorse gambling expansions to help offset budget deficits, the makers of slot machines and other gambling technologies -- like WMS Industries (NYSE: WMS  ) , Bally Technologies (NYSE: BYI  ) , and International Game Technology (NYSE: IGT  ) -- should benefit, too.

An immediate beneficiary is MTR Gaming, which has divested several gambling assets so it can concentrate on racetracks, including one in Columbus, Ohio. When the news broke Friday afternoon, the company's stock jumped more than 50% to $3.48 on trading volume that was five times the daily average.

The much larger, more diversified Penn National, which has a racetrack in Toledo, Ohio, also should benefit.

More money without taxes
Since I first referenced state budget woes and the prospects for casino, racetrack and gambling machinery companies in February, states' financial conditions have worsened. The National Conference of State Legislatures says at least 25 states have investigated expansion of gambling and/or lotteries to raise revenue.

However, gambling isn't a sure bet. This year, efforts in Alabama, California, Maine, Nebraska, and Wyoming have failed, according to data compiled by the National Conference of State Legislatures through June 15; new laws have taken effect in Delaware and Florida.

Meanwhile, Churchill Downs (Nasdaq: CHDN  ) is pressing ahead with a project already approved by Florida regulators. It broke ground last month for a slot-machine casino at its Calder Race Course near Miami, Fla. However, a Kentucky state senate committee recently rejected a bill to permit slot machines at Kentucky racetracks, including the home of the Kentucky Derby.

Investors in racetrack and gambling companies know their industries are heavily regulated. Even in tough economic times, betting on companies dependent on politicians can be a long shot.

For more Foolishness on gambling stocks:

Fool contributor Robert Steyer doesn't invest in any companies cited in this article. The Fool has a disclosure policy.

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