Casinos Fume Over Smoking Bans

By Robert Steyer
August 21, 2009 | Comments (6)

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You'd think casino operators have enough worries with depressed consumer spending and high debt levels. You'd be wrong.

Add smoking bans to the list of woes cited that gambling companies say are cutting into revenue and creating uncertainty.

SEC filings of companies like Ameristar Casinos, Penn National Gaming (Nasdaq: PENN), and Isle of Capri Casinos claim revenue damage from existing laws and warn about future impacts from legislation under consideration.

Here's a typical comment from Penn National. Anti-smoking legislation "appears to be gaining momentum" in states where the company has, or plans to establish, gambling properties, says a recent 10-Q statement. The Penn National filing refers to laws in Colorado, Pennsylvania, and Illinois, plus proposals in other states. If more bans are enacted, "our business could be adversely affected."

Measuring the effect
Casino companies designate tobacco legislation in the risk-factors section of their reports to the SEC -- right up there with warnings about acts of God, dangers of debt, concentration of share ownership, and the recession.

The American Gaming Association, an industry trade group, says consumer spending on commercial casinos dropped last year for the first time since it began compiling data in 1999. Along with the recession and gas prices, AGA cited smoking bans in some states as causing the decline to $32.54 billion from $34.13 billion.

Smoking bans will have a greater effect on small, privately owned casinos. Large public and private operators with many properties spread over many states -- or countries -- can better absorb the impact from the smoking bans.

However, anti-smoking laws underscore the fragility of casino revenue, especially when it comes to matching quarterly results to analysts' expectations. Any earnings surprise, or even a modest miss can send a stock skidding in this climate.

Taking a hit
It might seem like a stretch to say that what's good for Altria Group (NYSE: MO) and Lorillard (NYSE: LO), is good for Las Vegas Sands (NYSE: LVS) and Wynn Resorts (Nasdaq: WYNN). Yet some independent research indicates that casinos aren't just blowing smoke when they complain about tobacco bans.

An analysis by two economists at the Federal Reserve Bank of St. Louis says that the first 12 months of the Illinois smoking ban caused "significant downturns" in attendance and revenue at Illinois casinos.

They compared Illinois gambling to casinos in Missouri, Indiana, and Iowa, which didn't ban smoking. They controlled their research for the impact of other factors. They estimated that the Illinois law caused a $400 million drop in revenue in 2008 at nine casinos -- down 20% to 22% from 2007 -- and a 12.3% decline in admissions. Major players in Illinois include Penn National, Harrah's Entertainment, and Boyd Gaming (NYSE: BYD).

Debating the impact
Smoking bans raise many questions about economic impact, including questions about how data is analyzed.

Four years ago, researchers at the University of California at San Francisco issued a report saying that a Delaware smoking ban enacted in late 2002 didn't affect total revenue or revenue per slot machine at three "racinos" -- racetracks that have slot machines.

However, one St. Louis Fed economist argues that their research contained data errors. His analysis showed that the law caused a "significant decline" in racino revenue.

And although a casino may be hurt after a smoking ban is imposed, do customers stay away forever? Does new competition within a state, or from another state, play a bigger role in a casino's decline in attendance and revenue?

Exceptions, changes, revisions
Even when a law is enacted, it can have loopholes, be amended, or be inadequately enforced.

In New Jersey, there's a partial smoking ban on 75% of gambling floor space in casinos owned by companies such as Harrah's Entertainment, Trump Entertainment, MGM Mirage (NYSE: MGM), and Boyd Gaming. The partial ban is due to a 2007 Atlantic City ordinance, which is based on a 2006 state anti-smoking law.

In April 2008, the Atlantic City council voted to ban all smoking in all casinos, but in October 2008, it voted to delay the total ban for at least 12 months.

New Jersey casinos continue complaining. Harrah's recently blamed second-quarter and half-year drops in revenue versus year-ago periods on the recession, competition from neighboring states, and "smoking restrictions in Atlantic City."

Lighting up your portfolio
Casino operators insist that public health legislation creates uncertainty. Investors must decide for themselves.

Although I doubt anyone intent on investing in gambling will vote yes or no solely on smoking bans, you can't deny that there's a balancing act of risk and reward.

On the one hand, you have public health experts armed with medical data about the dangers of smoking and second-hand smoke. On the other hand, you have the restaurant, tavern, casino, and tourism industries -- plus their lobbyists -- decrying the economic impact of smoking bans. You also have politicians frantically scrambling to balance budgets amidst a recession.

If you agree with the latter group, there are many other gambling-industry woes to affect your investment decisions.

If you believe the public health advocates will prevail and casino operators' worst fears will materialize, then maybe casino stocks aren't your play.

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Fool contributor Robert Steyer doesn't own shares of any companies cited in this story. Ameristar Casinos is a Motley Fool Hidden Gems recommendation. The Fool has a disclosure policy.

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Report this Comment On August 21, 2009, at 11:20 AM, spokanimal wrote:

I couldn't help to notice a glaring omission in your article:
Tribal Casinos
Washington State has a multitude of "metro-mini" casinos which offer table games but not slots. They were able to compete with tribal casinos well enough for gamblers that preferred table games... until the state smoking ban went into effect. As a result, several in my region of the state went out of business.
The reason for that in eastern washington was because the tribal casinos thumbed their nose at the law. Northern Qwest Casino, the area's largest, has completely ignored the ban and embarked on a massive expansion without regard for the impact that their favored status has had on the competition. Staff members at the facility have repeatedly told me that they have no intention of giving up their "unfair advantage". Similarly, Northern Qwest was politically involved in defeating proposed laws that would allow slot machines in the metro casinos... again, to perpetuate the greedy advantage that they maintain over their competition.
As the old saying goes... if you can't beat 'em, ignore the laws that hurt 'em and enact the laws that cripple them.
Just don't play on an even playing field!
Report this Comment On August 21, 2009, at 1:53 PM, MichaelJMcFadden wrote:

There's no "debate" over what smoking bans do to bars and casinos: it decimates them. The only appearance of a debate comes from the lobbyists and paid researchers getting grants from antismoking groups and funds to produce the "right" sort of research results. See a prime example examined in Jacob Grier's May 27th column (Be sure to read the after-commentary!) where researchers snagged a half-million dollar grant with such a research proposal and then covered up the catastrophic results to the bar industry. See:
http://www.jacobgrier.com/blog/archives/2210.html
And if you want to see what bans do to gambling receipts see this simple graph from official Minnesota government figures:

http://arclightzero.web.officelive.com/Documents/MNGraph.pdf

When that graph is extended through 2008 the "Worldwide Economic Meltdown" shows up as little more than a blip at the end of years of disastrous smoking bans.
Smoking bans are based on lies, both about the economic effects and the "deadly health threat" of wisps of secondary smoke in decently ventilated businesses. The economic lies are easier to see and prove, but the health lies are just as bad if you take the time to investigate them.
Michael J. McFadden
Author of "Dissecting Antismokers' Brains"
Report this Comment On August 21, 2009, at 8:06 PM, virgilKlein wrote:

HOUSE COMMITTEE ON ENERGY AND COMMERCE HEALTH AND ENVIRONMENT SUBCOMMITTEE STATEMENT OF HON. THOMAS J. BLILEY, JR. JULY 21, 1993 Mr. Chairman, I am testifying today in order to report to the Subcommittee the results of my extensive investigation of the EPA's handling of the controversy surrounding environmental tobacco smoke or "ETS". As you know, in the past the Oversight and Investigations Subcommittee of this Committee has conducted hearings on EPA's abuses of government contracting requirements. So pervasive is the level of abuse that Chairman Dingell has characterized EPA's pattern of contract mismanagement as a "cesspool". EPA's Inspector General recently has confirmed that such abuses also have taken place in connection with a number of EPA contracts involving ETS, and the O and I Subcommittee's own investigation is continuing. In addition to various contractual improprieties, however, my own investigation suggests that in its consideration of ETS, the Agency has deliberately abused and manipulated the scientific data
Full report here...
http://www.pipes.org/Articles/Bliley.html
Report this Comment On August 21, 2009, at 8:13 PM, virgilKlein wrote:

http://www.smokershistory.com/piglung.html
The Pig Lung Scam, Again and Again
The anti-smokers lie to children by obtaining pig lungs from meatpacking plants, soaking them in chemicals, and then claiming that this is what tobacco smoke does to them.
"Obviously, it was a lung, but it was as black as coal, bore tumorous growths and couldn't hold its air very long. 'This is what happens when you smoke,' Capt. Rob Pankiw, drug demand reduction administrator with the Delaware National Guard's Counterdrug Task Force, told a gaggle of wide-eyed adolescents in Dover. Pankiw described the centerpiece of his anti-smoking display as the diseased lung of a 150-pound man who smoked for 15 years. Actually, it was a pig's lung shot full of various carcinogens on purpose, but, as Pankiw said later, his lesson was made stronger by not passing along that tidbit of truth." (Burning passion brings 700 kids to anti-smoking rally. James Merriweather, Dover News Journal 2001 Apr 6.) But after this brief episode of truth, the article degenerates into the usual anti-smoking screed.
Merriweather / Dover
This old lie, which is making the rounds again, was presented to all new Airmen shortly after arriving at their permanent base. I first saw this film in 1960 as a mandatory showing. I later found that the lung was not human but a pig lung that was treated with chemicals to make it look diseased to those who were ignorant of actual facts. They were spreading this lie to reduce smoking in the Air Force. What is old is new again. Anything will be said to further the cause. When we are ignorant of the facts, the facts do not matter and fraud has no meaning. When I pointed this out about the lung that the ACS used at the New Albany smoking ban meeting, Mayor English dropped any more meetings about smoking bans.
Truth means nothing when it serves the agenda. I use this to show just how far they will go.
Report this Comment On August 24, 2009, at 3:18 PM, THISISSOCIALISM wrote:

This is just another form of SOCIALISM setting in. People need to open there eyes and see whats going on here. This is the government trying to run our lives once again!! As for the casino's, I would would recommend an alternative, I found mine for my bars at www.Crown7.com. This alternative has saved my 3 bars from going down the tubes!
Report this Comment On October 08, 2009, at 9:05 PM, smitharn wrote:

Most of the pro-smoking studies have been done spanning over a major recession and where paid for by people with vested interes. it is not clear if the decline is because of smoking ban or not.
Also, many smokers may avoid going to casinos after the ban, but many non-smoker that did not go to casinos because of the second hand smoke many become casino goers after the ban. #smokers<#non-smokers

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