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Why Casino Stocks Dropped Like a Rock Again Today

By Travis Hoium - Mar 11, 2020 at 2:43PM

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Travel fears are back.

What happened 

Shares of casino stocks had a rough day on Wednesday as coronavirus fears hit the travel and entertainment industry hard. MGM Resorts International (MGM -7.54%) fell as much as 17.3%, Penn National Gaming (PENN -2.33%) dropped 12.1%, and International Game Technology (IGT -6.55%) plunged as much as 20.2%. At 1:30 p.m. EDT shares were still down 11.9%, 10.9%, and 19.2% respectively. 

So what

The factors driving casino stocks lower are largely out of operators' hands. One is that the market overall is down and some casino stocks are giving up gains that they made yesterday. IGT, in particular, is falling hard but is actually trading higher than its Monday closing level. 

Roulette wheel with a black background.

Image source: Getty Images.

Investors are also fearing that the coronavirus worries are going to clobber the casino industry for the foreseeable future. Travel has already plummeted as consumers stay home and businesses shut their doors to reduce the spread of the virus. 

For the casino industry, the impact is going to be widespread. Not only will hotels and casino floors be impacted, but conventions -- a huge business in Las Vegas and across the country -- are being canceled at a rapid rate. It's possible the convention shutdown will last for many months and impact business for the rest of 2020. Given the uncertainty, investors are jumping ship. 

Now what

Long-term, casino companies will return to normal when travelers return. The problem is that we don't know when that will be. Investors should keep an eye on broader travel trends for signs that the decline in travel is subsiding. And earnings reports after the first quarter will tell us a lot about how companies are absorbing the impact. 

The only comparison we have for the convention cancellations and drop in consumer demand is the Great Recession, and that left multiple casino operators in bankruptcy or forced to raise funds. We aren't there yet, and the industry has done a good job reducing leverage over the past decade, but the impact will be felt quickly. 

It's important to keep an especially close eye on balance sheets. Highly leveraged companies are at the most risk during an industry downturn. That's one reason IGT and Penn National have fallen today. They're paying the price for their acquisition sprees over the last decade. 

As a Foolish investor, I think now is the time to start getting bullish on casino stocks. But it could be a bumpy ride for the next few months before the industry stabilizes. 

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Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
$33.00 (-7.54%) $-2.69
International Game Technology Stock Quote
International Game Technology
$20.11 (-6.55%) $-1.41
Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
$30.20 (-2.33%) $0.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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