Should You Gamble on Casino Stocks?

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:

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 the entire industry, rather than a specific set of casinos. 

Turning to Melco Crown, it may not be surprising that CAPS members are smiling on its stock. Melco is one of the handful of companies currently licensed to operate casinos in the huge gaming center of Macau. In 2008, the region – once a Portugese colony that was returned to China in 1999 -- reported more gaming revenue than the Las Vegas Strip and Atlantic City, combined.

Melco owns and operates the Crown Macau casino and resort, as well as a smaller casino and a group of clubs that focus on gaming machines, and has managed to do it while keeping its balance sheet from being overloaded with debt. The opportunity at Melco, though, is still very much on the come. It is gearing up to open the City of Dreams later this year, a massive project that it says is "set to become the 'must experience' urban entertainment destination in Macau."

The rest
The CAPS community obviously hasn't taken a very optimistic view of the rest of the casino operators, but I wouldn't wipe them all off your radar. Wynn has a relatively concentrated group of some of the best casinos in Las Vegas and Macau, and while its debt-to-equity ratio looks a lot like its competitors', it has over $1 billion in cash and has kept its interest payments pretty well covered. I also think Wynn could potentially be an acquirer.

Penn National and Boyd Gaming may be two others to keep an eye on. Both companies have significant cash available to them through their balance sheets and undrawn lending commitments, and both have made it clear that they are on the hunt for acquisitions. And with big fellas like MGM potentially selling off major assets, it's a good time to be a buyer.

Mission: CAPS
So where do we go from here? Well, you've got an opinion and we've got CAPS. Why not head over to the CAPS community and let the 130,000 members know how you feel about the big names in gaming? CAPS is absolutely free and just might help you become a better investor.

And if you're curious where I stand on the gaming companies, Wynn Resorts is getting a thumbs-up in my CAPS portfolio. It may not be one of the highest rated on CAPS, but I believe it has some of the best gaming properties and the financial wherewithal to not only survive the downturn, but also potentially be an acquirer.

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