Why You Shouldn't Bet on Gaming

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Casino companies Boyd Gaming (NYSE: BYD  ) , Penn National Gaming (Nasdaq: PENN  ) , and Las Vegas Sands (NYSE: LVS  ) all reported quarterly earnings this week, and they weren't pretty. In fact, you'd probably be better off hitting the roulette tables than letting your money ride on gaming stocks. Let's take a brief look at their results to understand why.

Oh, Boyd
Boyd closed down more than 17% for the day on Tuesday, and is down about 45% since its 2012 peak in February.

But why has the stock taken such a beating? Probably because Boyd missed both its EBITDA and EPS estimates. On top of that, Boyd has made a point to acquire abysmal locations in spots as varied as Mulvane, Kan., Amelia, La., and Dubuque, Iowa.

Boyd's only potential advantage over its competition is its miserable net margin of 0.2%. This is a potential catalyst because if Boyd is able to increase net margins by as little as 100 basis points, profits will multiply six times over.

The hope is that the recent Southern and Midwestern acquisitions will boost the company's presence in those regions, and higher margins will follow. It's likely that Boyd's astronomical P/E -- it trades for more than 90 times earnings -- takes this into consideration already and is counting on more impressive margins moving forward.

Penn National: nothing special
Penn National Gaming reported results that were a bit more tolerable, but still nothing that wowed investors.

That said, there were a few warning signs I noticed from the conference call:

  • Only half of Penn National's properties posted year-over-year EBITDA growth.
  • Not an insignificant portion of time was spent debating the futures of properties in Columbus vs. Toledo -- not exactly a sign of exciting growth prospects.
  • The company barely missed revenue estimates, reporting $712 million vs. an expected $722 million.
  • Management announced it was "pleasantly surprised ... with the good weather and the extra day in February." Any company surprised by the fruits of a leap year could be in trouble.

Maybe Las Vegas Sands will bring some good news?

Maybe not
Las Vegas Sands -- unlike Boyd and Penn National -- pays a dividend, and it's by far the largest and most successful company considered here. The current dividend yield is around 2.7%, and its market cap stands at about $30 billion. For some perspective, Penn National's has a market cap around $3 billion, while Boyd's is less than half a billion.

However, even Las Vegas Sands is not immune from sector-wide issues. Its profits fell dramatically from the same quarter last year, failing to meet analyst expectations.

The company announced net income of just $240.6 million, nearly 35% less than second-quarter earnings in 2011 -- in that time the stock has fallen just a bit more than 20% itself. To reverse this trend, Las Vegas Sands will have to count on Macau and Singapore as continued areas of growth. For an idea of how dominant these markets have become, consider the numbers: Macau and Singapore property EBITDA averaged almost $400 million in the second quarter, compared to the paltry $64 million EBITDA of Vegas properties.

Better luck next time
Unfortunately, these three earnings reports seem to be telling investors that the gaming industry is slowing. If these results serve as a snapshot for the health of casino companies, they may want to retake the picture.  

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Fool contributor John Divine owns none of the stocks mentioned in the story above, and you can bet he's not going to anytime soon, either. You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine.

The Motley Fool has a disclosure policy .We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (5)

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 July 27, 2012, at 11:24 AM, JF125780 wrote:

    Thanks for dispensing information only a "fool" would not know. It's quite telling that this history lesson is only just that ___ and no "Divine" revelation here for the future.

    What "fool" did not know, since LVS had a great record breaking first quarter, that the second quarter report would be anemic. All accounting advantages were placed on the first quarter report.

    Don't kid yourself, with what LVS has coming on line for the remainder of this year, with the strength of the company, and the size of the Asian market, the future of leisure there is solid.

    Danny Kowkabany

  • Report this Comment On July 27, 2012, at 11:28 AM, cp757 wrote:

    John I can see your point and they do have challenges. You started to take a shot at Las Vegas Sands and I think you are smart to pull back because its not slowing in Singapore.

    Las Vegas Sands has 98% occupancy at the Marina Bay Sands and they are adding 1500 rooms to the property just to keep up with demand and this will give them over 4000 rooms.The Marina Bay Sands had continued growth in it's high margin hotel revenue up 30% in the second quarter and the retail mall revenue was up 13% Singapore visitation is growing at 17% a year . The (STB) forecasts S$23 to S$24 billion in tourism receipts and 14.5 million visitor arrivals for 2012 .

    Its not slowing in Macau. Las Vegas Sands is adding 6,400 rooms to keep up with demand because China is helping the casino operators with more infrastructure to bring visitors to Macau. They are building a bridge from Hong Kong to Macau at a cost of 10.7 billion dollars. In the second quarter in Macau Las Vegas Sands increased retail mall sales by 37.1% and hotel by 24%. These revenues reflect the strength of the

    integrated resort business model.

    In the second quarter in Macau LVS had huge VIP initiatives meaningfully growing rolling volume to a record consolidated rolling volume of $33.35 billion up 36.3%

    The also had strong mass table and slot growth with a record consolidated non‐rolling win and

    slot win of $577.1 million up 30.7% and $122.0 million up 27.3%, respectively

    Las Vegas Sands is adding 10,000 more rooms next to Cotai Central that will bring the total rooms to 24,000 in Macau for Las Vegas Sands.

    Las Vegas Sands will build The Venetian Hengqin International Convention and Resort Project, a 10,000 room multi-billion dollar plan to develop parts of Hengqin Island into a convention and resort destination. The project is to include four million sq ft of convention space, hotels, retail, vacation homes, and golf, tennis and yachting amenities.

    The Zhuhai Municipal People’s Government, People’s Republic of China has issued an official letter informing the company that the Zhuhai Government has now established a Project Coordination Committee specifically related to the company’s proposed development of The Venetian Hengqin International Convention and Resort Project in Zhuhai.

    Las Vegas Sands has over 80% of its business in Asia and that is going to continue to grow. We seem to be cheering for Asia to fail but we need to understand that they are growing the middle class in China, as we had done so well in the past. That is the wealth builder

    Traffic from China to Macau has increased over the last Twelve Months Ending June 30, 2012. They will have over 30 million visitors from all of Asia in 2012 but these are the figures on some of the larger cities.

    Guangdong has 95 million people and the number that went to Macau was 8,295,741 up + 12%

    Fujian has 36 million people and the number that went to Macau was 931,500 up + 23%

    Zhejiang has 51 million people and the number that went to Macau was 603,219 up + 20%

    Hunan has 64 million people and the number that went to Macau was 584,318 up + 44%

    Shanghai has 19 million people and the number that went to Macau was 487,537 up + 20%

    Beijing has 22 million people and the number that went to Macau was 328,157 up + 27%

    Chongqing has 31 million people and the number that went to Macau was 195,931 up + 45%

    Tianjin has 12 million people and the number that went to Macau was 120,615 up + 44%

    The illegal gambling in China is 600 billion dollars a year and they will go to Macau and gamble . This will not slow down because of any GDP change from 12% to even 7% and to think it will is foolish.

  • Report this Comment On July 27, 2012, at 3:59 PM, XMFDivine wrote:

    JF125780, I appreciate your feedback. I will be the first to admit that my surname, unfortunately, does not afford me the power of prescience.

    I think analysts were expecting a subdued--not altogether unconscious--quarter from LVS. I see your point on Asia, and if you'll notice, at the end of the piece I actually praise the success of that market for LVS.

    But I stand by my theory that when year-over-year net income falls by 35%, it's not a bullish sign by any means. Given the company situation I cannot in good conscience endorse an investment I do not believe in.

    I could certainly be wrong about LVS, I just don't see the sort of momentum I usually look for (i.e. positive growth, at minimum) in promising investments.

  • Report this Comment On July 27, 2012, at 11:43 PM, cp757 wrote:

    John your comment to Danny about positive growth, at a minimum, misses the truth. The fact is Net revenue increased to $2.58 billion up 10.1% and next quarter's average estimate for revenue is $3.04 billion. Thats growth

    In the first half of the year Las Vegas Sands had Adjusted property EBITDA of 1,955 billion dollars and that is higher than the first six months of 2011 and thats growth. This is also on pace for 3,909 billion dollars for the year and thats growth. The last two quarters will be stronger because of more growth and this will give LVS over 4 billion in EBITDA. Do you know how many companies will have that kind of EBITDA in the sector. None.

    Las Vegas Sands achieved an industry record $3.5 billion in EBITDA in 2011 and in 2012 they will make over 4 billion and thats growth. The reason everyone sees the glass half full with the 3.909 billion in EBITDA is they do not understand how the properties will ramp up. The third quarter for Cotai Central will be much higher and the fourth quarter will be even higher. Thats growth.

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