In spite of what the commercials suggest, not all things that happen in Vegas stay in Vegas. In fact, events affecting the gambling segment of the entertainment business are having an impact on virtually all segments of the gambling industry. The drop in revenues and profits has been most visible with the publicly traded companies like Las Vegas Sands (LVS) or Wynn Resorts (WYNN).
As economic conditions worsen, however, the weaknesses in Las Vegas operations are being mirrored across the country. Revenue drops of as much as 25% have been reported by some of the riverboat operations in Illinois. Similar reductions in revenue and profits are being seen in many of the Native American gaming facilities throughout the nation.
One of the largest operations outside of Las Vegas, the Foxwoods Casino in Connecticut, has said that the tribe will likely be forced to reduce its per capita payments to tribal members as a result of reduced activity at the casino. Operators of Foxwoods and many others of these facilities have cited high gas prices and the economic strain being felt by their primary demographics as the culprit.
Casino stocks have tumbled at a pace far surpassing the general market, as often happens during an economic downturn. Las Vegas Sands has dropped from a 52-week high of $123 to a low of $4 and is currently trading just above the company’s low at $6.
Boyd Gaming (BYD) dropped from $39 to $3.70 and trades at a little over $4, and MGM Mirage (MGM) dropped from $93 to $9 and now trades at $10.50.
For the investor with risk tolerance, purchase of stock in the gaming industry has the potential for significant upside. This is especially so as…
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…gaming will likely continue to appeal to a broad segment of the public.
The industry has experienced downturns before, but almost always related to conditions in the economy, not as a consequence of a fundamental change in the entertainment habits of the public or changes in the legislative or regulatory framework in which the gaming industry operates.
Of course, with this economy it may take time for stock investments to pay dividends. Another option would be to consider debt of the gaming companies because the bonds in this space currently offer higher yields to reflect the current risk.
One of the better options available is the purchase of bonds issued by MGM Mirage (MGM). These bonds are available in a wide range of maturities. At current prices, bonds in the 5-year range offer yields in excess of 20 %.
MGM continues to expand its business, both domestically and internationally. While the company has experienced a decline in revenues similar to those affecting other companies in this sector, the company recently secured additional capital through the private placement of its notes.
This capital will allow the company to continue to expand and to operate its current facilities. In the meantime, the purchase of MGM obligations in the 5-year range will deliver high current returns, as well as a high yield to maturity.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article. Jim has over 40 years experience in the credit markets including serving as Director of the Minnesota Housing Finance Agency in the 1970’s. He also led the fixed income group of a large regional brokerage firm before owning his own firm that specialized in underwriting and trading fixed income securities. He is a contributor to The Rational Investor, but most importantly he is my father.
