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.

AXA S.A. (AXA) held its autumn investor conference on 25 November 2008, in which management announced that it expects AXA’s underlying earnings to be in the range of €3.6 bn - €4.0 bn for FY 2008, reflecting the impact of overall weakness in global financial markets on the company’s performance.

We expect economic conditions to continue to negatively impact performance in the near-to-medium term. However, AXA maintains that it has a strong capital position and does not need additional capital despite the deteriorating financial conditions. AXA’s indication that it continues to look at options to increase its global presence through strategic partnerships and acquisitions that are not dilutive to shareholders is attractive. Although AXA announced that it has now set aside its “Ambition 2012” targets, it believes that the current environment will allow it to “differentiate itself from competition”. We believe that the recent decline in the common stock price has left the stock undervalued.

ARM’s (ARMH) 3Q 08 results outperformed our expectations and current macroeconomic uncertainty has not deterred the company from reiterating its FY 2008 total revenue guidance first offered in 4Q 07. Although deteriorating consumer demand is expected to impact ARM’s Licensing segment, Royalty revenue growth coupled with favorable currency movements will help ARM in the near term.

Based on the current scenario, ARM does not expect to see a decline in top-line in FY 2009, making the company a rarity in the semiconductor industry. However, in view of limited visibility in FY 2009 and declining consumer demand in the context of recessionary conditions, we do not anticipate significant growth momentum in the year. Despite our belief that ARM has strong fundamentals, given that the ARM common stock has outperformed the broader FTSE 100 Index and the majority of leading technology stocks in the last six months, we believe that the company’s fundamental strength is already factored into the current stock price.

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Globally, coal prices are witnessing a significant spike, thanks to the growing steel demand and supply constraints. Coal, which is one of the major raw materials for producing steel, is already short of 25 to 35 million metric tons in FY 2008 across the globe, which is likely to reach 70 mn metric tons in FY 2009 (as per Steve Leer, Arch Coal Inc. chairperson and CEO). Recent floods in Australia, the world's second largest coal exporter, forced several coal producers to shut down their mines, resulting in a huge decline in coal output in the first quarter of FY 2008. According to Macquarie Bank Ltd., coal production from Australia may decline by approximately 15 million metric tons, or about 12 percent of Australia's annual exports in FY 2008.

In addition, a power crisis faced in South Africa in January 2008 and thereafter a reduced power supply from Electricity Supply Commission (Eskom, South Africa's national power supplier), resulted in a shutdown of several mines and forced coal producers to cut their output, which further decreased the coal production. Meanwhile, International Iron and Steel Institute forecast that demand for steel is going to increase by 6.7 percent in FY 2008, led by an 11.5 percent increase from China. The shortfall in production of coal along with the increasing demand for steel led world's leading steelmakers such as Nippon Steel Corporation, ArcelorMittal (MT), JFE Holdings Inc. and Pohang Iron and Steel Corporation (POSCO), to increase contract coking coal prices approximately 200% to US$300.00 a metric ton for the 2008 coal year (commenced 01 April 2008). On a similar trend, contract prices for thermal coal, used in power plants, more than doubled to US$125 a metric ton for FY 2008.

Globally, fertilizer prices are witnessing a significant spike, thanks to the rising food demand and supply constraints further compounded by rising input costs. Global food demand has been increasing since last few years driven by driven rising population, rising standard of living in developing nations, and increasing use of food grains such as corn, maize, soybean in production of bio fuels. Rising food demand coupled with supply constraints due to limited availability of arable land, climatic changes, export restrictions by various governments have necessitated increase in agricultural productivity boosting demand for agricultural inputs such high yielding seeds, pesticides and fertilizers

Though high yielding genetically modified [GM] seeds, resistant to climatic changes and pests can be used to increase productivity but their utilization is limited due to government restrictions and severe opposition from environmentalists. The use of pesticides and insecticides is also of limited use as excessive application can render crop unfit for human consumption. Hence the onus of increasing agricultural productivity largely falls on fertilizers. Thus, going forward fertilizer usage is expected to increase significantly sustaining higher fertilizer prices. Furthermore, rising input costs of key raw materials such as natural gas and sulphur coupled with rising transportation costs, due to higher crude oil prices, will result in higher fertilizer prices. Prices of natural gas and sulphur used in production of nitrogen and sulphur fertilizers have increased 62% and 350% y-o-y in June 2008, respectively. (Source: Bloomberg and Tempa Sulphur)