Are Casinos Too Much of a Gamble?

Shares of casino operators in Las Vegas have had a bumpy ride since the recession hit. Those diversified into the Chinese gambling mecca of Macau have at least had a good hedge, but now that China's economy is showing signs of slowing, what will happen with gaming stocks?

The Chinese boom
However, for Las Vegas Sands (NYSE: LVS) Macau has become vital. How important is Macau to Las Vegas Sand's bottom line? Well, more than half of its quarterly revenue -- over $2 billion -- was derived from operations in Macau. In fact, during the company's most recent earnings call, analysts only asked about operations in Macau; not one question about its Las Vegas operations was asked. 

Indeed, as of late, Macau has been hot. Across the board, casinos in Macau have brought in $12.6 billion in gambling revenue already this year -- a 19.8% increase over the first quarter of 2013. Conversely, Las Vegas gaming revenue is down 12% this year. 

Peaks and valleys
If you've been to Las Vegas in the last 5 years, you've probably noticed a lot of stalled construction, particularly along the north end of the famous Strip. Before 2008, major casino operators like MGM International (NYSE: MGM) and Boyd Gaming (NYSE: BYD) were competing for prime space along the Strip. In traditional Vegas fashion, old casino resorts were leveled to make way for prodigious new ones. However, when the economy took a dive, most of those projects were abandoned, even the ones already under construction.

Today, those projects are again under way, along with many new ones. This week, MGM released details of a new park that will connect its New York-New York and Monte Carlo resorts. The park, which MGM is calling an "interactive neighborhood environment," is set to open in 2016. It will house a new 20,000-seat area, mature trees, and 50-foot "tulip-like structures" that will offer shade during the day and an LED light show at night. There will also be water features along the park's entrance that will span more than 100 feet. Additionally, MGM recently stated that its $80 million rebranding of one of its non-gaming Vegas properties is nearing completion. The project will transform MGM's THE Hotel (a sister property of Mandalay Bay) into the Delano Las Vegas. Prospective guests will be able to book one of its 1,100 rooms starting September 1.

Also this week, MGM announced a joint-venture with Hakkasan Group, a London-based operator of Chinese fine dining restaurants, to develop luxury hotels worldwide. The newly formed venture will develop and manage non-casino resorts, hotels, and residences under the Bellagio, Hakkasan, MGM Grand, and SKYLOFTS names. This should provide MGM with a hedge against downturns in gaming in both Vegas and Macau. However, as of late, both Vegas and China have been good for MGM. Recently released Q1 earnings show $2.6 billion in net revenue, which is up 12% from a year earlier. Some encouraging sings for sure.

Diversification is important
Not every gaming company in Las Vegas is showing signs of recovery though. Las Vegas-based Boyd Gaming has most of its eggs in Las Vegas' basket. While it operates a number of casinos throughout the U.S., it has no presence in Macau. Some investors like that about Boyd, but when American gaming revenues are down, Boyd suffers worse than some of its competition.

Lately, this is painfully true for Boyd. After hours on Wednesday, the company released its earnings and they did not impress. Boyd reported a quarterly net loss of $61.2 million, citing bad weather and market softness. However, there was some glimmer of hope as it reported that recent losses actually narrowed over those of the same quarter in 2013. The company also pointed to improved figures from Las Vegas locals visiting its off-Strip and downtown casinos.

The bottom line
Right now, Las Vegas Sands seems to be the best bet. It is ridding high on revenues from China and if Las Vegas is headed for recovery, investors in LVS stand to benefit greatly from increased revenue from LVS's Venetian and Palazzo resorts. Meanwhile, MGM is placing big bets on new attractions and new rooms on the Las Vegas Strip that should bring visitors to its properties, and to Las Vegas as a whole. Meanwhile, Boyd's losses are shrinking with the help of local Las Vegans. These are very positive signs for the gaming industry and it may be time to look seriously at some of these companies.

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