Casino and Gambling Industry a Risky Bet

Includes: BYI, PENN
by: Research Oracle

Audit Integrity takes a look at the struggling casino and gambling industry and identifies what it believes are the weakest performers based on their corporate governance characteristics.

The casino and gambling industry has been battered by the economic downturn. Both higher-end luxury destinations, such as Las Vegas and Macau, and lower-end locations, such as Mississippi riverboats, have suffered from weaker consumer spending. There are no expectations for a recovery in the short-term, with the U.S. unemployment rate having risen to 9.8% in September, up from 7.6% in January. Casino operators are delaying or suspending development projects during this recession, in sharp contrast with continued building during other difficult economic times.

The outlook for the casino industry remains bleak, as companies face declining gaming revenues, high fixed costs, and highly-leveraged balance sheets.

Audit Integrity’s forensic analysis of accounting and corporate governance practices distinguishes between the companies of greatest and least risk via our Accounting and Governance Risk (AGR®) ratings. Companies in the bottom-ranked Very Aggressive AGR category have had consistently opaque financial reporting, weak corporate governance, and as a group are expected to have inferior performance relative to their peers over the next three months on a total return basis.

In keeping with the broader market companies with a Very Aggressive AGR rating have been outperforming companies with a more Conservative profile. Audit Integrity says” This is not an indication that our AGR signal no longer works. It is simply a function of the market responding to the pendulum having swung too far in the downward direction in 2008.”

Audit Integrity’s bottom-rated company in the US isPenn National Gaming Inc (NASDAQ:PENN), and in Europe is Wiliam Hill, plc, both with Very Aggressive AGR ratings.

Shares in Penn National rallied slightly to $29 after reporting a third quarter profit fall on Oct 21, but have since been declining steadily to a new low of $25 today.

The highest-rated company is Bally Technologies, Inc (NYSE:BYI) with an Average AGR rating and “Strong” financials.

Analysts at Morgan Joseph reiterated their “buy” rating on Bally Technologies on Oct 21. The target price has been raised from $47 to $57.

For latest analyst comments, see Alacra Street Pulse.

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