Mike W.

Casino Stocks Scream Value Play

The Las Vegas operators are in serious trouble. This is a case of supply and demand being thrown completely out of equilibrium. This never was a recession resistant industry. It was an industry which had limited supply during the last recession. Yes, there was no shortage of regional casinos, but it wasn't until cheap financing came along that these faciliteis were able to afford a face-lift and add amenities that made them competitive. So what did Las Vegas do in response? To stay relevant, they embarked on a ludircrous expansion plan and added features which had no earthly way of generating a decent return. Moreover, they all expanded at the same time (again fueled by morons) and justified the escalating construction costs by emphasizing that they were targeting the high end gamers - many of whom were to come from Asia.

Look at the pathetic return on investment that these projects produced. MGM and Dubai World will be lucky to generate 5-6% on invested capital for the CityCenter project. Even the much adored Steve Wynn is getting smoked. His Encore project was a monument to himself and will never be a serious money maker.

In most industries the solution to this dilemna would be to take out capacity/supply. But how do you do that in Las Vegas? Do you start emploding casinos like the Imperial Palace or Excalibur? Imagine what the Strip would look like afterwards? Gaps between pearly white teeth. How many casinos would you have to tear out to offset CityCenter? Encore? Eschelon? Fountainbleau? You simply cannot take out capacity in any meaningful way.

That leaves you hoping that demand not only rebounds but grows. I won't debate when the economy is going to turn around but I am of the belief that the amount of wealth destruction that has taken place is going to take years, if not decades, to fix and that leaves visitors reluctant to pry open their wallets.

There will be several bankruptcies in the next twelve months. My top candidates are LVS and MGM. WYNN will make it through by virtue of its ability to set room pricing on the Strip and the money that it prints in Macau (which can tax efficiently repatriate to the U.S.).

Carnage pure and simple. The length of the buffett line doesn't change that. A cheap, hot meal will always sell.


On Aug 01 01:26 PM PhillipKing wrote:

> I would just like to point out to the "TruthMissle" that if you took
> any time to do any due dilligence rather than just write indignant
> comments, you would have noticed on the author's blog that this article
> was written before BYD delayed their Echelon Project. Since they
> just announced that this morning, it certainly just seems like it
> was unfortunate timing for the author.
> If you did take the time to listen to Boyd's call though, you would
> have noticed that they are only temporarily delaying the Echelon
> project not cancelling it. They only expect this to be a short term
> measure.
> On another note, I was just in Las Vegas two weeks ago and I fully
> agree with the author, it is more crowded than it ever has been.
> I had a wait of an hour and a half just to get into buffett at the
> Rio. And the foreign tourists are coming in droves too...these casinos
> are still making money the way I see it, but they're spending so
> much too on projects like Echelon and City Center. I fully agree
> with the author that they'll turn it around as soon as these projects
> are completed.
>
> Phillip