Tough Times Lie Ahead for Casinos
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m not exactly sure why people drive for hours to get to a casino. To me it represents a concerted, motivated effort for people to give away their hard earned money to commercial syndicates. And as casinos sprout up just across state lines in Pennsylvania, and slot parlors in New York, gamblers in New Jersey seem to be asking themselves the same question.
All New Jersey’s casinos are located in Atlantic City, making them quite a haul. When casinos first opened in Atlantic City in 1978, people formed throngs, dying to get inside. This of course was because New Jersey casinos essentially had a monopoly for gambling on the East Coast, at least the legalized, non-Soprano variety, coupled with pent up demand.
Today, as gaming becomes legal in more and more locales, the absurd profitability of the formerly monopolistic East Coast casino industry has ground to a halt. Margins have been pressured, in addition to revenues. As new casinos opened across state lines, and the “great recession” took hold, revenues plummeted from $5.2 billion in 2006, down to $3.3 billion in 2011.
New Jersey Governor, Chris Christie, won’t back the expansion of gambling houses throughout the state, instead of attempting to give Atlantic City time to get its house in order via new marketing campaigns, tax breaks for developers, and state oversight of cleanup responsibilities. Christie intends to give the casinos five years to show results, and is not in favor of a Meadowlands casino (closer to New York).
I think it is highly predictable, that this experiment is a waste of time and money.
The truth is those customers and revenues are never coming back to Atlantic City. Forget it, give it up, you’re dreaming Christie. There’s absolutely no reason to drive to a crime ridden, aging, dirty Atlantic City when the same product is available to you only minutes away, especially with gas prices at their currently elevated levels, and real wages having dropped or remained stagnant for the last decade. Atlantic City simply does not have the same drawing power as Vegas.
So, will the same hold true for Las Vegas? Look anywhere in an old MGM (NYSE: MGM) annual report and they specifically state that the legalization of gambling in California would have a material impact on the company’s earnings and prospects, similar to the new cross state casinos opening on the East coast.
However, even so, Las Vegas does have the advantage of having made itself a true attraction. Unlike Atlantic City, its casinos still glitter, and are often worth seeing on their own, and the entertainment infrastructure they have built up is second to none, put in place over years to attract the whales (high rollers) and big conventions.
Gambling worked wonders for the state coffers in Nevada and Atlantic City when they had virtual monopolies. However, in order for gambling to benefit its locale, revenues must come from non-residents, (out-of-towners) otherwise you prey on your own tax revenue base, robbing money from your citizens which they would otherwise spend at the clothing store, on groceries, with the casino taking some of the profits for themselves, adding friction and inefficiency to the taxation of one’s own tax base)
Interestingly, the one locality that has safeguards in place is Singapore. Having been to Las Vegas Sands’ (NYSE: LVS) Marina Bay, I witnessed the elaborate safeguards the country has to protect its citizens against gambling. Not only do they try to discourage Singaporeans from entering the casino by charging a $100 fee per 24 hour entry, but anybody in your family can call to say that you have a gambling problem, and you’ll be barred for months.
Singapore has built a huge tax base from its two casinos, with most of its revenues coming from Chinese and Arab gamblers, with fractional amounts coming from the truly determined and stupid Singaporeans willing to pay the $100 entry fee.
Now New Jersey, and to a lesser degree, Nevada are suffering as gamblers stay home to do what they formerly could not do locally. It only makes sense for states losing revenues to Atlantic City and Nevada to attempt to keep the money at home by opening up casinos of their own. Unfortunately, as gambling spreads, counties begin to become reliant on their own local populations, as few gamblers will go out of their way to spend their money out of town.
While Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands’ derive most of their revenue from overseas, specifically from the Chinese market who fill the casinos of Macao in Singapore, MGM gets the majority of its revenue from Las Vegas, somewhere in the neighborhood of 75%. MGM has leveraged itself to the hilt with its City Center project, and if Congress ever gets its act together, cutting spending, and raising taxes in order to deal with a growing deficit, the U.S. consumer is likely to be severely affected, and disposable income destined for gambling halls will dry up even more.
MGM might look cheap compared to where it once traded, but it remains hard pressed based on current conditions to keep up with its massive interest payments, let alone its maturing bonds. Based on this analysis, I highly recommend staying away from gaming companies with a lot of US exposure, including Boyd Gaming (NYSE: BYD), Caesars (NASDAQ: CZR) and MGM. Gaming stocks to have been taking it on the chin as of late, as the two leaders Wynn Resorts, and Las Vegas Sands, missed quarterly projections.
However, if you really want to own gaming stocks, stick with the leaders, (Wynn and Sands) and dump the those mentioned above with a lot of exposure in the US. The unfortunate truth as I see it, based on our budgetary problems, and the increasing competition from new casinos opening putting pressure on margins, is that tough times lie ahead for US casino companies.
margiecfl has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
