Please ensure Javascript is enabled for purposes of website accessibility

Casino Industry Goes on Lockdown: Here's What to Expect

By Travis Hoium - Mar 16, 2020 at 1:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Most casino companies are shutting down operations this week to deal with the coronavirus outbreak.

A month after Macao, an autonomous region in southern China, shut down the casino industry for 15 days, the U.S. casino industry has decided to do the same. Over the weekend, MGM Resorts (MGM 1.19%), Wynn Resorts (WYNN 1.29%), and Penn National Gaming (PENN 2.48%) all announced the closure of some or all of their casinos. 

Las Vegas Sands' (LVS 1.32%) properties in Las Vegas will stay open, and Caesars Entertainment (CZR) is only shutting down live entertainment, but the Las Vegas Strip may be a ghost town anyway. 

The Las Vegas welcome sign at sunset

Image source: Getty Images.

The hit to Las Vegas will be swift

There isn't much precedent for the actions being taken by the casino industry, but we can learn a little from what Macao went through in February. Casinos were shut down for 15 days starting on Feb. 5, and gaming revenue there declined 87.8% over that month. 

The duration of the Las Vegas shutdown isn't yet known, but it's clear we'll see the impact quite soon. There's no question investors should expect the first quarter to come with a huge decline in revenue and likely large losses across the industry. 

Leverage hurts

If a company's management is prone to taking some risks, the downsides of that attitude become more pronounced in times like these. And the biggest risk for casino companies is the debt that's overhanging their businesses. During the financial crisis, it was leverage or debt that got companies into trouble, and the conservative companies survived. Casino stocks that got hammered were holding a lot of debt, and there are reasons to be worried about some of those names today. 

The chart below gives an approximation of casino companies' risk by showing financial debt compared to EBITDA, or a proxy for cash flow coming into the business. 

CZR Financial Debt to EBITDA (TTM) Chart

CZR Financial Debt to EBITDA (TTM) data by YCharts.

If cash flow goes to zero, this ratio may not matter, but it gives us an idea of how much cushion companies have when operations are normal. 

Another valuable way to look at risk is debt compared to cash on the balance sheet. On an absolute level, Las Vegas Sands has the most debt, but it also has by far the most cash and can likely weather a financial storm better than most casino operators. 

CZR Total Long Term Debt (Quarterly) Chart

CZR Total Long Term Debt (Quarterly) data by YCharts.

Caesars Entertainment, on the other hand, is highly leveraged ($8.5 billion in debt to $1.8 billion in cash) and doesn't have much cash to fall back on. That could lead to financial difficulty as losses mount from operations starting this month. 

Investors should expect changes 

This is a time when companies will be using all of their tools to survive the crisis until business returns to normal. During the casino shutdown, these companies will be cutting costs from raw materials and labor, but there are limits to what can be saved. They will all likely need to fall back on the cash on the balance sheet. 

If this crisis lasts for a while, and revenue falls into the summer, we should expect dividends and share buybacks to be reduced or come to a halt. Wynn Resorts, MGM Resorts, and Las Vegas Sands are three dividend-paying companies that may be at risk in the next few months. However, saving that cash may be the right move now that operations across most of the country are temporarily closing their doors. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$65.26 (1.29%) $0.83
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$34.89 (1.19%) $0.41
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$34.62 (1.32%) $0.45
Caesars Entertainment Corporation Stock Quote
Caesars Entertainment Corporation
CZR
Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
PENN
$32.28 (2.48%) $0.78

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.