Gaming Industry Far from Recession-Proof

by: Dr. Bill Conerly

Oops, Wall Street got another industry wrong. After proclaiming that casinos were recession-proof, they've recently learned just the opposite. Here's what one mutual fund manager said before the downturn:

 

“Gaming stocks perform much more like consumer staples than consumer discretionaries. When you look at the long run, people are going to gamble no matter what.” – Dan Ahrens

 

Here's what happened to gaming industry stock prices:
Gaming
Just a couple of months before the gaming industry stock prices hit their peak, economists sharply raised their estimates of the risk of recession. What happened?

According to a Wall Street Journal story (subscription required), the gaming industry is hurting:

  • Four casinos have filed bankruptcy this year
  • Several gaming companies have defaulted on their debt
  • Moody's has downgraded the debt of 17 gaming companies, with 11 more on watch for possible downgrades.

In addition to these signs of distress, the casino expanded rapidly in recent years, and now sees consumers cutting back on discretionary spending. Boutiques and restaurants are vital to casino profitability these days, so spending is critical.  Travel costs are up, whether for airfares or gasoline. And the local market in Vegas is hurting because of the collapse of residential home prices, down 12 percent in the last four quarters.

My own calculations for my book, Businomics, indicates that the change in consumer spending on gambling at casinos is -7.8 percent from peak to trough, a little milder than average for consumer spending. (See details here by scrolling to row 231; definitions at the bottom of the worksheet.) If you had used this information in combination with the rising risk of recession, you would have sold gaming stocks in the neighborhood of the peak. If you had bought the industry's self-hype that it was recession-proof, and held your gaming stocks, you would have had a 38 percent loss--so far.

Business strategy lesson: before you believe the industry lore that your business is recession-proof, you should look at the data.