Any James Bond fan worth their Walther PPK knows the Daniel Craig version of Casino Royale is about arms dealing more than it is about casinos. Regrettably, during my Bond tour (diamonds and water thus far) I had a hard time finding public arms manufacturing companies. So I have to drive my Aston Martin over to casino stocks. Not a bad thing. I'd rather have money on my hands than blood, plus there's a casino scene in every other Bond film.
When things are booming, casino resorts can be great for investors. These businesses can make money from customers in a lot of ways. I remember the early 1990s in Las Vegas, when casinos attracted me with their cheap buffets and modest room rates. Now, however, Las Vegas has become an upscale experience. Each new resort tries to be more lavish than the last. Gourmet, name-brand restaurants have taken the place of the $9.99 all-you-can-eat prime rib buffet. Multimillion-dollar Cirque du Soleil spectacles overshadow the cabaret show. Retailers like Harry Winston Diamond ensconced themselves in the Forum Shops at Caesars Palace because they know that many high rollers and big winners want to buy nice things for their ladies.
In short, anyone who has ever watched a Vegas documentary on television knows that casinos are designed to relieve visitors of every penny. And that doesn't even mention the gaming side.
Assess before you gamble
So the question is whether there is more risk to buying into the casinos now than playing high-stakes baccarat a la Bond, James Bond. The answer depends entirely on how you feel about the economy's prospects.
The first thing to understand about casinos is that they are usually part of a hotel resort, and that makes these stocks economically sensitive. When you consider the fate of hotel stocks recently, you want to be buying casino resorts just as we exit a recession, not as we enter one. One way to do that is to keep track of RevPAR (revenue per available room) and occupancy trends, which you can do by reading Smith Travel Research's news releases. The most recent report showed very favorable trends in this regard. If occupancy starts to slip and pricing power can't be maintained, that may be a signal to exit casino stocks.
Right now, however, investors are seeing significant increases in revenues at some of the public resorts. For Wynn Resorts
Revenue is important to every company, but it is particularly important to hotel-casinos. It takes billions to build these things, and the companies that do it take on a lot of debt to do so. When choosing a possible company to invest in, you have to examine the leverage and debt- service situation. You don't want to end up in a situation like MGM Mirage
Other games to play?
For a while, the growth in this sector was happening in the infrastructure areas. Companies like International Game Technology
Over the long term, I have to say I like Wynn Resorts the most. Steve Wynn has been around so long, he didn't overleverage, and he survived the recession handily. The company sits on plenty of cash and feeds its debt service easily. Mind you, I say "over the long term." The stock is pricy at 56 times next year's earnings. A short-term trade is not the play here.
Las Vegas Sands is interesting, and it trades at "only" 33 times next year's analyst estimates. Investors might raise an eyebrow at negative free cash flow, however. Beware of this one.
Penn National Gaming trades at 21 times estimates, it's smaller, and its cash flows are improving, but 2008 and 2009 were tough on the company.
The takeaway is that if you believe Vegas is at a bottom, it would behoove you to survey the risk of each company just as you would each casino game. There's high risk and high reward out there; there are some bets that may not yield massive returns, but nice ones if you are in it until the next recession hits.
Until then, don't hit on 16.
Fool contributor Matthew Brown does not own shares of any company mentioned. The Fool owns shares of International Game Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.