Profit in Casino Management, Not Casinos
Gaming firms at risk of Chapter 11.
Las Vegas, in particular has never seen such a dramatic reversal of fortune. I've been in Vegas this fall; not a day goes by that I don't hear about the downturn in casino business and associated layoffs. Lately, fear that casino companies like Las Vegas Sands (LVS) may reorganize in Chapter 11 have come to forefront.
The mood is obviously very downbeat and raw, but the question for investors is whether or not the casino business is worth investing in right now, at these very depressed levels. The key to answering it lies in the balance sheets of the gaming companies.
And when I look at the balance sheets of MGM (MGM), Sands, Boyd Gaming (BYD), and Ameristar (ASCA), I see a lot of debt - and therefore a ton a leverage. When you look at the skyline of Vegas and still see the capacity additions of Wynn's (WYNN) Encore Hotel and MGM's City Center coming online, you can't help but see the deflationary forces continuing to build on hotel rates going forward.
This -- along with the private equity buyouts (huge debt outstanding) of the Harrah's and Station properties -- brings me to the conclusion that some casino operators are at real risk of going into Chapter-11 bankruptcy. Servicing all this debt in a town filled with overcapacity is the classic recipe for default.
But the casino industry isn't without opportunities. For example, International Game Technology (IGT) has been working on some innovations for the game of blackjack. They have developed some side bets for players to bet on while playing the game in order to increase revenue for the casino operators. In this environment, any innovative way to increase revenue is a welcome idea.
Another area where investors might find opportunities is in the casino management business. In particular, the 300-plus tribal casinos have a need for consulting and management assistance in these trying times. because most of them aren't gaming experts. This opportunity won't help the large overleveraged casino operators, but it will help an array of smaller players, such as Ellis Gaming and Rotate Black. These smaller companies are nimble, and are able to consult with and offer management help to the smaller tribal operations in need of casino expertise.
All in all, the gaming sector might look attractive, because the stocks have come down so far, but I would be careful about the debt loads of the large casino operators, and would look for opportunity in the consulting/management side of the industry.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter