Gaming Stocks Still a Poor Bet - Barron's

Includes: LVS, MGM, WYNN
by: SA Eli Hoffmann

On November 17, Barron's cover story called casino stocks losing bets. They were right: Since then shares of Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN) and MGM Mirage (NYSE:MGM) have slid 78%, 45% and 73%, respectively.

Conventional logic says 'sin stocks' often do well in a depressed economy as people increasing look to drown-out their woes. Still, Barron's remains unconvinced gambling stocks are a good bet - due largely to their 70%+ debt-to-capital loads.

CreditSights says MGM is at risk of breaking existing debt covenants as it struggles to fund a $9.3B Las Vegas casino with a Dubai investment partner. LVS needs about $1.2B over the next year to keep up with its debt and construction plans. Similarly, other casinos must continue to raise capital despite today's unfriendly environment, or risk falling behind in staking out their claims in the super-competitive landscape.

The pressure on casinos will relent when the lending freeze thaws and when consumers start spending again, but current signs aren't encouraging. The Chinese government has sought to temper the Macau boom by controlling visits, and revenue growth there has begun to slow from a once-raging pace above 50%.

While resilient during previous recessions, Goldman Sachs analyst Steven Kent thinks "this downturn could be different for gaming" now that 12 states host commercial casinos, vs. just two in 1980. Also, lucrative food, drink and entertainment revenue are likely to remain weak during an economic downturn, even if casino attendance remains strong.