Casino stocks have surged in recent years as VIP gambling in Macau has pumped up profits. But with Macau gaming facing headwinds now, the winning hand for casino stocks might well be in the resurgence of Las Vegas.
Although gaming once had the reputation of being a recession-proof industry, the sector’s luck ran out during the Great Recession. Between 2007 and 2009, major casino stocks lost as much as 90% of their value. But by mid-2010, Lady Luck found her way back and casino stocks began to surge again — in large part because of gaming operations in Macau, a former Portuguese colony administered by the People’s Republic of China.
Macau, with its high-end properties and lucrative VIP players, is largely responsible for delivering huge gains for casino stocks. Gaming revenue in Macau has been growing at a double-digit clip over the past three years and in March, industry analysts forecast gaming revenue to hit $40 billion this year.
But as every gambler knows, sooner or later your luck will run out. After kicking off this year with a growth rate of nearly 17%, Macau gaming revenue in June fell 3.7% year-over-year — the first decline since June 2009.
While the World Cup can be blamed for some of the slip, one key dynamic poses a short-term red flag: declining VIP play. In the aftermath of recent money laundering scandals and slower growth in China, Macau’s gaming revenues will continue to rise, but at a far slower pace than the 30% growth gaming companies have experienced in recent years.
The silver lining to the Macau clouds was that Nevada gaming revenue soared by more than 14% in June. There are early indications that Macau revenue growth was stronger in July than it was in June — and that bodes well for the sector over the long haul. Still, the short-term headwinds in Macau can’t be ignored. Here are two casino stocks to play — and two to stay away from now: