Weak economy trumps casinos
By Matt Krantz
USA Today
Investors who bet on companies that offer gambling in Las Vegas aren't used to losing money.
Historically, Vegas has been relatively immune to the problems that plague the broader economy. Last year, for instance, while the rest of the economy was starting to crack, shares of the largest Las Vegas casino operator, MGM Mirage, gained 47 percent, and that after a 56 percent gain in 2006.
But now the realities of a slower economy are starting to affect Las Vegas, and that's bleeding into the casino operators' stocks. Higher energy costs, which translate into pricier flights and drives to Vegas, and less-confident consumers have injured Vegas stocks — and stripped their traditional reputation as havens in tough times.
"The credit crunch and housing crisis have been a double whammy that really hit the consumer and, in turn, hit discretionary spending for gaming," says Tom Marsico, portfolio manager at Marsico Funds.
The latest evidence came Monday, when Tropicana Entertainment, the privately held operator of the Tropicana casinos in Las Vegas and Atlantic City, filed for bankruptcy protection. MGM, the largest publicly traded casino, also shows the pain. The stock is down 38.3 percent this year, on track for its largest annual decline since it started trading in 1989.
Factors behind the problems for Vegas include:
Average room rates are down as much as 15 percent from last year, he says. The average room rate was down 5.1 percent in February from a year earlier, the latest official data available from the Las Vegas Convention and Visitors Authority. Even a small decrease in room rates has a direct effect on how much casinos earn. Traditionally, casinos make 70 cents of every $1 in room charges, but that margin is being eaten into by the lower room rates, LaFleur says.
Room rates are critical because Vegas has gone from being more of a full-service resort and less of a quick stop for hard-core gamblers. That means room rates have been an increasingly big piece of profits. Vegas casinos get 58 percent of their revenue from things other than gaming, including room charges, says Esther Kwon, stock analyst at Standard & Poor's.
Gaming revenue in the Vegas area, including the Strip, fell 4.1 percent in February, says the Las Vegas Convention and Visitors Authority.
"You see more competition, and it will just increase," Kwon says.
There are looming dangers, too, that some other even bigger projects may face financing issuers. Boyd Gaming, for instance, is building the Echelon and will likely need additional financing, Kwon says.
