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Should You Gamble on Casino Stocks?

http://www.fool.com/investing/general/2009/04/28/should-you-gamble-on-casino-stocks.aspx

Matt Koppenheffer
April 28, 2009

If there's a group of companies besides the banks that epitomized the danger of leverage, casino operators might be it. Whether it's Las Vegas, Macau, Louisiana, or elsewhere, gaming companies tend to employ healthy amounts of debt when they build new properties. And boy have they been building.

The problem is that as the economy continues to deteriorate, Vegas vacationers aren't as plentiful and convention-attending corporations are tightening the purse strings. Outside of Vegas the picture isn't too much different. That, combined with mountains of debt, has created big headaches for casinos and their shareholders.

The threat of debt
Thus far, the economic downturn has led to declines in gaming revenue almost unheard of in Las Vegas. And although these declines may appear very moderate from a top-line perspective, the high leverage levels are taking a much bigger bite out of profits. At MGM (NYSE: MGM  ) , for instance, 2008 revenue fell just 6%, but with over $600 million in interest payments, earnings before taxes and impairments plummeted 49%. The top line actually increased for Wynn (Nasdaq: WYNN  ) in 2008, but a growing debt load contributed to a 59% drop in pre-tax, pre-impairment income.

Interest payments have actually overcome Station Casinos, an operator of casinos aimed at Las Vegas locals. That company -- which was the subject of a management buyout back in 2007 that loaded it up with debt -- now may be close to a bankruptcy filing. Meanwhile, Riviera Holdings recently reported a missed interest payment, as did the owners of Hooters Hotel. Trump Entertainment Resorts has already filed for bankruptcy protection.

But even the big boys face headier issues than just falling profits when it comes to their debt. Deteriorating results are putting some operators precariously close to tripping debt covenants -- protections that lenders put in lending agreements to make sure a company can live up to its commitment. At the same time, some casino players have significant amounts of debt due within the next few years. As of Dec. 31, 2008 MGM was looking at over $1 billion due this year and next, and then faces over $6 billion in maturities in 2011.

Make a bet or fold?
In The Motley Fool's CAPS community, it would seem that there are precious few gambling stocks worthy of your hard-earned money. Here's a look at CAPS members' views of the major stocks in the industry:

Company

CAPS Rating
(out of 5)

One-Year Performance

Debt-to-Equity Ratio

International Game Technology (NYSE: IGT  )

****

(70%)

249%

Melco Crown Entertainment (Nasdaq: MPEL  )

****

(69%)

64%

Ameristar Casinos (Nasdaq: ASCA  )

**

(9%)

487%

Boyd Gaming (NYSE: BYD  )

**

(58%)

232%

Las Vegas Sands (NYSE: LVS  )

**

(90%)

221%

MGM

**

(88%)

339%

Penn National Gaming

**

(21%)

119%

Wynn

*

(65%)

270%

Source: Yahoo! Finance; Capital IQ, a division of Standard & Poor's; and CAPS.

The best
It's a pretty bleak-looking group from CAPS members' point of view, but there are a couple of four-star stocks sticking out like surfers at the North Pole. So what are these favorites doing that the rest aren't?

International Game Technology may have a balance sheet that looks like a casino operator, but it's the only name on this list that doesn't own a single gaming establishment. Instead, IGT provides those devilishly tempting machines that populate the floors of the many casinos around the world.

While the company does depend on the level of coinage going into its machines for some of its revenues, IGT benefits from the performance of