Uncertain economy. Unfinished buildings. Unrealized expansion plans. Unyielding balance sheets. Unclear forecasts for tourism spending.
For investors, are all of the above unmistakable signs that investing in Las Vegas is dead money? Or at least money that won't produce the lively returns of the not-so-long-ago days of cheap credit, booming tourism, full hotel rooms, and fearless expansion?
Although some casino-industry executives see early signs of hope, or at least an easing rate of decline, investors have to wonder about the scope and speed of a comeback and how prominent a role Las Vegas will play in their investments.
There are multiple gambling and investing opportunities in and around Las Vegas as well as the rest of Nevada, but we're focusing on the Strip, the biggest source of gambling revenue in the United States.
If you're investing in luxury Strip casino owners such as Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS), your key to a higher share price lies more in Macau than along Las Vegas Boulevard.
The numbers say so -- both companies get more revenue from Macau than from Las Vegas. And the proof is in the pudding: Wynn Resorts and Las Vegas Sands are adding properties in Macau; they aren't expanding in Las Vegas.
And just to top it all off, executives say so. Sheldon Adelson, chairman and CEO of Las Vegas Sands, recently told The Wall Street Journal that he doesn't plan to build again in Las Vegas. He's already "fulfilled."
Some keep betting
If you've been happy with "Not Vegas" companies such as Boyd Gaming (NYSE:BYD) or Penn National Gaming (NASDAQ:PENN), do you want these Las Vegas Strip wannabes taking a risk in a crowded Strip market still reeling from recession?
Boyd Gaming has backed off at least temporarily, in saying it won't consider restarting construction on its Echelon project for three to five years.
But Penn National is ready to jump in, having made an offer for the unfinished, bankrupt Fontainebleau Las Vegas. The proposal requires bankruptcy court approval, and other companies may bid in an auction that could be held in mid-January. If the big boys aren't willing to play in the sandbox anymore, what makes Penn National think it can?
And if you're a bond investor in the private Harrah's Entertainment or a stock and/or bond investor in MGM Mirage (NYSE:MGM), are you convinced that your company's heavy investment will recover? Each owns multiple properties on the Strip. They also have some of the ugliest balance sheets in the industry.
The next big thing
The inflection point for the Las Vegas Strip is MGM Mirage's CityCenter, a 67-acre complex of gambling, retail space, entertainment venues, hotels, and condominiums, whose first phase is scheduled to open next month. Developed as a joint venture with a subsidiary of Dubai World, CityCenter will be a test not only of MGM Mirage's fortitude but also of its strategy.
If CityCenter, which has already cut the costs of its condominiums, can expand the size of the Las Vegas Strip market, the developers and even its competitors should benefit. But if people flock here at the expense of other casino operators, hoteliers, residential real estate companies, and retailers, then members of these groups will be hurt. Worse yet, if CityCenter fails to meet MGM Mirage's ambitious goals, the company will be in some serious trouble.
Leading indicators
Investors contemplating a Las Vegas Strip-related investment must pay attention not only to balance sheets but also to trends that affect attendance and spending.
US Airways Group (NYSE:LCC) recently said it would cut its daily flights at Las Vegas' McCarran International Airport to 36 from 64. The carrier is the second-largest at the airport, behind Southwest Airlines (NYSE:LUV). For the first nine months, McCarran's traffic had fallen by 10.2% from the year-ago period and US Airways was off 33.9%. US Airways, in essence, has said it's cutting flights from places that aren't as financially fruitful. I think that speaks for itself, but if you want further evidence of declining traffic, a recent report by airline consulting firm Boyd Group International said McCarran's traffic wouldn't return to 2008 levels until 2014.
Investigate the numbers
Investors must check the details behind comments about future signs, such as Adelson's recent remark that his Las Vegas Strip group bookings for 2010 had already exceeded those expected for 2009. That's good news. But investors should follow up on how many bookings are realized and how much revenue comes from those bookings, especially if the key to a full house is a sharp discount.
Although The Motley Fool has discussed this before, it bears repeating. Aside from gambling revenue, a crucial number on the Strip and at any other gambling resort is revenue per available room, or RevPAR.
During the third quarter, MGM Mirage's Strip hotels matched the year-ago quarter's occupancy rate of 95%, but RevPAR fell by 23%.
For Las Vegas Sands, third-quarter RevPAR at the Palazzo fell by 29.8% as the occupancy rate fell by 6.6 percentage points. RevPAR at the Venetian Las Vegas fell by 20.4% as occupancy dropped by 3.3 percentage points.
Hotel revenue, along with money spent on food and entertainment, plays a big role in a casino's health. For instance, Las Vegas Sands' Strip rooms account for about 43% of its total Vegas revenue, so if RevPAR is down across the boards, casinos are going to take a huge hit.
As if we didn't have enough ways to illustrate the decline in Vegas traffic, a recent report illustrated that September was the 21st month in a row in which Vegas winnings declined in aggregate.
Let's be clear. Las Vegas isn't dead, and it won't die, as a source of gambling and entertainment. There's optimism in the industry for a modest rebound next year. However, investors need to do a lot of extra math to decide whether their company's investment in Strip casinos will energize their stock or hold it back.
