Atlantic City Takes a Beating

Is it possible to find a bright spot amid the drumbeat of dreary data for Atlantic City's casinos, hit by a prolonged slump that led to a 15.1% drop in revenue for the first eight months of the year versus the year-ago period?

The only good news for equity investors is that there aren't many equity investors affected by Atlantic City's woes. (Bondholders should be fretting, though.)

However, equity holders should be upset with the apparently healthiest casino, Borgata, which is owned by MGM Mirage (NYSE: MGM  ) and Boyd Gaming (NYSE: BYD  ) . During the second quarter, Borgata was the best of the bunch because it was the only casino with a better operating profit versus the year-ago quarter. But new data from the state of New Jersey shows Borgata endured an 11.2% revenue decline in August versus a year ago.

Collective revenue from the city's 11 casinos dropped 16.3% in August, affecting the many privately held properties, including four owned by Harrah's Entertainment, as well as three owned by the publicly traded but bankrupt Trump Entertainment.

The causes
Atlantic City is no different that any other venue that has been hit by cuts in consumer spending. The Las Vegas Strip, where MGM Mirage duels with Wynn Resorts (Nasdaq: WYNN  ) and Las Vegas Sands (NYSE: LVS  ) , recorded an 11.1% drop in revenue in July versus July 2008.

But Atlantic City faces challenges from neighboring states, especially as Pennsylvania adds more gambling sites, such as Las Vegas Sands' slots-only casino in Bethlehem. Experts say Pennsylvania is draining some gamblers from New York, Philadelphia, and northern New Jersey who might have traveled to Atlantic City. (Pennsylvania doesn't allow table games.)

Initial Bethlehem results look promising. The Sands casino, which opened in late May, reported $20.2 million in revenue in August. That was fifth among nine Pennsylvania commercial gambling outlets, most of which offer slot machines at racetracks.

More competition
More unwelcome news is on the way. Delaware just launched sports betting at its three racetracks -- including one owned by Dover Downs Gaming & Entertainment (NYSE: DDE  ) -- which also offer slot machines. It's too early to assess the impact, and betting is restricted to multigame wagers.

In this environment, Atlantic City offers a lesson about other gambling towns, too, where flat or shrinking revenue is being split among a fixed or growing number of players. As for bond and stock investors, you don't have to bet against Atlantic City's casinos. You can simply bet around them.

Fool contributor Robert Steyer doesn't own shares of any companies cited in this story. The Fool has a disclosure policy.


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