Profit in casino management, not casinos

The gaming sector has been under a lot of pressure this year. Hotel rates have fallen due to a drop in demand, along with numerous capacity additions.

Las Vegas, in particular. has never seen such a dramatic reversal of fortune. I've been in Vegas this fall; not a day goes by that I don't hear about the downturn in casino business and associated layoffs. Lately, fear that casino companies like Las Vegas Sands may reorganize in Chapter 11 have come to forefront.

The mood is obviously very downbeat and raw, but the question for investors is whether or not the casino business is worth investing in right now, at these very depressed levels. The key to answering it ies in the balance sheets of the gaming companies.

And when I look at the balance sheets of MGM, Sands, Boyd Gaming, and Ameristar, I see a lot of debt - and therefore a ton a leverage. When you look at the skyline of Vegas and still see the capacity additons of Wynn's Encore Hotel and MGM's City Center coming online, you can't help but see the deflationary forces continuing to build on hotel rates going forward.

This -- along with the private equity buyouts (huge debt outstanding) of the Harrah's and Station properties -- brings me to the conclusion that some casino operators are at real risk of going into Chapter-11 bankruptcy. Servicing all this debt in a town filled with overcapacity is the classic recipe for default.

But the casino industry isn't without oportunities. For example, International Game Technology has been working on some innovations for the game of blackjack. They have developed some side bets for players to bet on while playing the game in order to increase revenue for the casino operators. In this environment, any innovative way to increase revenue is a welcome idea.

Another area where investors might find opportunities is in the casino management business. In particular, the 300-plus tribal casinos have a need for consulting and management assistance in these trying times. because most of them aren't gaming experts. This opportunity won't help the large overlevereged casino operators, but it will help an array of smaller players, such as Ellis Gaming and Rotate Black. These smaller companies are nimble, and are able to consult with and offer management help to the smaller tribal operations in need of casino expertise.

All in all, the gaming sector might look attractive, because the stocks have come down so far, but I would be careful about the debt loads of the large casino operators, and would look for opportunity in the consulting/management side of the industry.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Mark Bloudek.

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Comments

 

A few select casino management companies may be successful in generating substantial annual growth in revenues and profits.  They may just be small enough, having bad a relatively short life as a business, that they can generate substantial percentage growth in revenues and earnings per share each year.  Normally, the stock prices of these growth companies will continue to move higher over time as long as the growth is sustained.  Sophisticated investors are always searching for these growth stocks as they tend to move higher regardless of the state of the general economy.  There is more info on growth stocks at http://www.GrowthStockTips.com

Larry (Posted 12.01.08 10:54 AM) Report Abuse

Rotate Black = ROBK.  It looks very interesting but information on it is hard to come by.

News Monkey (Posted 12.01.08 11:06 AM) Report Abuse

A few select casino management companies will be successful in generating annual growth in revenues and profits even when the economy is in a recession.    Some of the smaller, relatively young companies with solid business models will be able to realize substantial annual percentage growth in revenues and earnings per share.  It is much easier for a firm to achieve a rise in revenues $1 million to $2 than from $10 million to $20 million, yet both represent a 100% increase.  Investors will embrace these companies regardless of the general state of the stock market.  More info on growth stocks at http://www.GrowthStockTips.com

Hank (Posted 12.01.08 1:07 PM) Report Abuse

Looks like its time to leave Vegas...Last one out, Turn out the lights.

modfly (Posted 12.01.08 9:35 PM) Report Abuse

ROBK looks very interesting to me.  It looks like they have a very strong casino management team in place. Stock is thin but trading lightly.

newsmonkey (Posted 12.05.08 2:30 PM) Report Abuse

I would look carefully at any investment with Rotate Black.  Information is hard to find, but if you dig deep enough you will see that John Paulsen has been very proficient in developing business failures, beginning with telecommunications and recently with internet development (eNucleus).  

Raymond (Posted 12.27.08 10:19 PM) Report Abuse

Vegas is down for the first time in what, 30 years?  This should hardly come as a surprise.  What goes up must come down.  This by no means should be taken as an indication that all Vegas properties are doomed.  There are still plenty of operations in Vegas in the black, just as there are plenty of companies across the nation still in the black.  Economic downturn is a natural part of the cycle - it weeds out the less viable business models and makes room for the next group.  

Stephen (Posted 02.24.09 2:00 AM) Report Abuse

Very nice site!

Very nice site! (Posted 05.19.09 12:26 AM) Report Abuse

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