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Benjamin Spillman
 

Gambling stocks tumble on economic woes

2 July 2008

By Benjamin Spillman

LAS VEGAS, Nevada -- If the stock market were a casino, investors in Las Vegas gambling stocks would be the bleary-eyed guy in the wrinkled suit watching helplessly as the dealer plucks chips from the felt.

Nine of 10 stocks on an index of publicly traded gambling companies lost value in June, including a 19 percent decline for shares in Las Vegas Sands Corp., the company that owns two of the swankiest resorts in Las Vegas.

The numbers weren't much better for the other prominent companies on the Applied Analysis Gaming Index.

Shares of MGM Mirage, which owns 10 Strip resorts. including Bellagio, MGM Grand and Mandalay Bay, sank more than 15 percent in June. Wynn Resorts Ltd. fell more than 12 percent.

Myriad woes of the battered American economy -- overheated energy prices, an ice-cold real estate market and tepid consumer confidence -- took the blame for sucking the value from the nation's most recognizable gambling companies.

"I don't know if anyone could have predicted the current climate," said Brian Gordon, principal at Applied Analysis who compiles the monthly index. "The question is the duration of how long current events will persist."

Then there's the bad news.

It seems markets punishing gambling stocks due to the turbulent economy haven't yet come to grips with the $41 billion building boom that's expected to produce 30,000 more hotel rooms in Las Vegas by 2012.

That means by the time Americans recover from the current problems and find cash to resume their gambling habits in earnest, the Strip will be awash in new hotel inventory, which could make it hard for resort companies to keep room rates high enough to make properties profitable.

"The market hasn't really focused on that risk yet," said Bill Lerner, a senior analyst for Deutsche Bank who specializes in hotel and casino companies. "Some of these projects run the risk of not exceeding their cost of capital."

However, Lerner thinks investors are overreacting to the current problems.

Some of the steepest drops are commensurate with expectations the companies in question will lose 30 percent or more of their cash flow, a situation far direr than any predictions.

Through April, visitor volume in Las Vegas is off less than 1 percent. And gambling revenue was down just 1.3 percent on the Strip.

"I think (stock prices) are going down more than they should," Lerner said.

In practical terms, the loss of value means the most to major investors who have their portfolios tied to the performance of gambling companies.

The depressed prices may also make it more costly for companies to borrow money or buy and sell properties, Lerner said.

If the housing crash and subsequent fallout hadn't dried up the credit markets, the low stock prices could make mergers and acquisitions more likely.

"The problem is with valuation declining at the magnitude it has; it is very hard," Lerner said.

According to the index, Las Vegas Sands, owner of The Venetian and Palazzo hotel-casinos, fell 19.2 percent in June to an average price of $57.38 compared with May. The company is down 25.7 percent compared with June 2007, when the stock traded for $77.26 per share.

MGM Mirage was down 15.4 percent for the month with an average trading price of $42.22. Compared with June of last year when it traded for $82.52, the stock is down 48.8 percent.

Shares in Boyd Gaming Corp., owners of Main Street Station, Sam's Town, Gold Coast, Suncoast, The Orleans and the under-construction Echelon, among others, fell 14.6 percent for the month to $15.14 and are down 70 percent since June 2007.

Wynn Resorts is one of the more durable stocks on the index. Wynn shares fell 12.4 percent on the month to $91.41, but are down just 2 percent since June 2007.

The valuation of the entire 10-stock index is down nearly 12 percent for the month and almost 36 percent from a peak in October.