Casinos: Still a Bad Bet

When I wrote last month that casino stocks were a bad bet, I didn't realize I was being optimistic.

Since then, Trump Resorts Entertainment has filed for bankruptcy reorganization. No surprise there: It's Trump's third visit to Chapter 11. The stock recently was delisted by Nasdaq.

The real shocker was the snake-eyes quarter Wynn Resorts (Nasdaq: WYNN  ) announced after the market closed on Feb. 24, driving the stock to fall nearly 19% the following day.

Adjusted earnings per share of $0.07, excluding one-time items, fell $0.37 below the Thomson Reuters consensus. Revenue of $614.3 million was 13% below the average Wall Street forecast, and 14% below the October-December 2007 period.

"I think that this is a period in which we're going to have to adjust to the fact that you're basically conducting a holding action and hoping that your capital structure allows you to do it," Stephen A. Wynn, the chairman and CEO, told analysts on Feb. 24.

And Wynn is one of the 'better' casinos rated by Moody's Investors Service, with a junk bond rating three notches below minimum investment grade. No commercial casino operator earns an investment-grade rating from Moody's.

More bad news
On Feb. 27, Moody's, Fitch Ratings and Standard & Poor's lowered their credit ratings on MGM Mirage (NYSE: MGM  ) to an even worse junk bond level, after the casino operator reported that it was drawing down $842 million from a $4.5 billion revolving credit facility. MGM Mirage said it acted because of "the continuing instability in the capital markets and uncertain state of the global economy." The stock fell more than 20%.

Meanwhile, Scientific Games (Nasdaq: SGMS  ) posted fourth-quarter earnings of $0.18 per share, excluding special items, which fell short of analyst consensus estimates. Revenue, too, was about 6% below the Wall Street consensus. Scientific Games' shares lost some 17% on the news. Sensing a trend yet?

The company, which specializes in lotteries, said it had begun a "profitability improvement program," which includes dismissing 8% of its employees, cutting 2009 capital expenditures to nearly half those of 2008, freezing hiring, eliminating 2009 salary increases, restructuring executive compensation, revising certain contracts, and investigating the sale of its racing and venue-management businesses.

Still wheeling and dealing
Despite the sinking economy, the increasing debt pressures, and the proclamations of woe, casino companies haven't halted their time-honored behavior of buying or expanding.

With the private Station Casinos ailing -- it's on Moody's high-risk-of-default list -- Boyd Gaming (NYSE: BYD  ) swooped on Feb. 23 to offer $950 million for some assets. Moody's promptly said it would review Boyd's junk bond rating for a possible downgrade.

This is the same Boyd Gaming that only a few months ago told investors it was halting construction of its Echelon casino in Las Vegas until the credit markets and the economy improve.

Boyd's bid came a few days before it offered a rare ray of sunshine for investors. On Feb. 26, it reported fourth-quarter earnings and sales that were in line with Thomson Reuters consensus estimates. In bucking the industry trend, the stock jumped 14% that day.

The sharp drops in stocks, based on bad news, and the big increase, based on modest news, should raise red flags about the climate for this industry. However, casino investors remain desperate for any news. Shares of the struggling Las Vegas Sands (NYSE: LVS  ) jumped 32% last week on no news other than a Bernstein Research analyst initiating coverage with an "outperform" rating. The very next day, the stock fell 20% to close at $2.28. Over the last 52 weeks, it has traded as high as $84.67.

Judging from the response to some of these stocks, you can't escape the feeling that casino investors -- like hardcore gamblers -- will bet on just about anything.

Roll the dice on further Foolishness:

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


Read/Post Comments (4) | Recommend This Article (8)

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  • Report this Comment On March 02, 2009, at 11:33 PM, juliehowe wrote:

    My boss always takes his employees to dinner at Indian casinos because of the great food they serve at the buffets. The nicer restaurants that we visit are almost always empty but there isn't an open seat available in front of any slot machine on the casino floor.

    I'm surprised that the Las Vegas resorts and casinos have taken such a huge financial hit in this current recession. The Indian casinos don't look like they're hurting for any business, although the empty restaurants might be a sign of things to come.

  • Report this Comment On March 03, 2009, at 9:30 AM, YIF wrote:

    If you can be convinced that any of these companies will not go bankrupt, these are once in a lifetime buying opportunities.

  • Report this Comment On March 04, 2009, at 1:48 PM, catoismymotor wrote:

    I somehow think George Clooney has something to do with this.

  • Report this Comment On March 24, 2010, at 11:43 AM, spokanimal wrote:

    Dear Mr. Steyer,

    The more you bash Macau-based gaming stocks, the more TOTALLY WRONG you are.

    Take Las Vegas Sands, for instance. There has NEVER been a case in corporate history where EBITDA and EBITDA projections of un-finished construction projects has ever been more relevant yet....

    .... I don't think you even know what EBITDA means!

    Spokanimal

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