The allure of Vegas is obvious, and over the years developers have made the city an adult Disneyland drawing oodles and oodles of customers. And with those customers, profits followed. The question today is, will those dollars continue to flow when consumers are strapped, losing jobs, and incomes stagnant?
I admit it. I’m a bit of a Vegas junkie. I love the town and the history of its growth is fascinating. The most important change in the city was the arrival of the monster resort.
Steve Wynn started the transformation by building the Mirage in the late ‘80s, and ever since the construction has not stopped. Watching those couple of miles of Las Vegas boulevard evolve over the years has just been amazing – from the old days of the Dunes and the Stardust to today’s mega-resorts like the Bellagio and Venetian.
If You Build It They Will Come
If you build it they will come … and come they did with millions of visitors helping fuel Vegas’ impressive growth. Bigger, better shows by superstar entertainers and celebrity chefs lured even more visitors, visitors that were happy to spend four figures on a single visit.
The flip side of all that spending is the dependence therein. When spending slows, profits fall and that is the big problem that the major players in Las Vegas face.
Consumers are cutting back on spending. They’re tapped out. Losing money in a casino is not a high priority, nor is spending a fortune on food. In order to lure visitors the hotels are now offering reduced room rates and vouchers for either gas or airfare. This in turn is eating into profit margins (see also, “Why Gaming Stocks Are No Fun Anymore“).
Share prices of the major players in the industry reflect this. One of my favorite names in the group, MGM Mirage (MGM) trades around $32 per share. That’s a huge discount to the $100 52-week high.
Despite Vegas’ current woes, I believe stocks like MGM are very close to a bottom. Remember the time to buy is when everyone else is selling.
Indeed the resort factor is working against Vegas (see also, “The Las Vegas Sands (LVS) of Time“). In the old days you could buy casino stocks in good times and in bad. Gambling as an addiction drew customers regardless of what the economy was doing.
Fortunately our economy is going through a process of recovery. The housing and credit crisis has been a challenge, but we are two or three years into the process of healing. Eventually a new cycle will begin and I think we are very close to that time. When it does, the casino stocks should do well again as consumers make up for lost time.
MGM is attractive for a number of reasons. Its properties cover a wide range of price points that will help during the last days of economic slow down. At the high end there’s the Bellagio and Mandalay Bay.
A notch below is the MGM Grand and The Mirage and below that are hotels like New York, New York, TI and Monte Carlo. The company also has family oriented properties such as Circus Circus and Excalibur. In addition the company has a smattering of properties in other parts of Nevada, Mississippi, Michigan, New Jersey and Macau.
Its massive CityCenter project last week secured $2.3 billion of the remaining $3 billion in funding to finish the project. Change in Vegas continues and with that change will come big profits for those owning the properties on and around the strip.
Though S&P recently lowered its outlook on MGM Mirage to negative from stable they did note that MGM maintains a “satisfactory risk profile as its significant position on the Strip offers a substantial source of cash flow and solid long-term prospects.” We’ll bet with the house. In the long-run the house always wins.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight likes this, go to: www.InvestorPlace.com.
