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July 28, 2006

Casino Stocks Have Lots of Downside

"A looming capacity expansion in hotel rooms and casino space, rising gas prices, an uptick in airfares, the possible peaking of the Las Vegas residential real-estate market, and the ongoing risk of global terrorism make the stocks of major casino operators good candidates for shorting." --- Steve Birenberg, StreetInsight.com, Long/Short Investor, 8/24/2005

OK, so I was one year too early.

Last summer, I suggested shorting Station Casinos (STN), Boyd Gaming (BYD), Las Vegas Sands (LVS), and (WYNN). In the same article I mentioned these trends were negative for MGM Mirage (MGM) and Harrah's Entertainment (HET).

As it turned out, 4 of those stocks are well below the price on the date of that post: BYD, -29%; STN, -20%; MGM, -12%; and HET, -9%. LVS and WYNN have defied gravity and risen sharply, however: LVS, +80%; WYNN, +40%. The later two have benefited from an unusually favorable growth profile as they open new casinos in international markets. I think their time is up and the decline of the last few days is just the beginning. Both remain at huge premiums to the more mature operators even on earnings a few years out when all their new projects will be open. In the current market environment, I don’t think the premium can last.

As for the general theme of being short gaming stocks, I believe that each reason I initially outlined a year ago remains in place. In fact, I think that you can drop the qualifiers like "possible" and "ongoing". Today's reality is that capacity expansion is hitting just as demand is turning lower. Funny how it always seems to work that way. The capacity expansion will remain above trend for several years so don't look for any sustainable rebound in casino stocks. They are just going lower.

Posted by Steve Birenberg at July 28, 2006 09:01 AM in Casinos