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Back in Black

Just when things began to turn around, it appears we've taken a turn for the worst

Back in Black

Is it just déjà vu? Or are the bad old times back?

Just when it appeared that the fundamentals had turned positive for all segments of the casino industry and were accelerating, we have hit a wall of negative economic reports suggesting consumers might withdraw again.

On the positive side, gaming revenues have grown throughout the United States, convention and meeting business is rebounding strongly, Las Vegas visitor statistics keep climbing, and there is always Asia, an oil well of money that just keeps gushing higher.

More recently, however, the economic stats have frightened many investors—job growth has all but disappeared, high gasoline and food prices are pinching consumers, factory orders and other measures of production growth have shrunk, and murmurs keep coming out of Macau about slowing the growth of the casino industry.

The concern, and the debate, can be seen in part through the outlooks of lead analysts for two of Wall Street’s biggest firms, Steve Kent of Goldman Sachs and Joe Greff of JP Morgan.

Kent and his team issued a 95-page analysis that sees the gaming industry through anything but rosy glasses.

Gaming is no longer a growth industry even though its stocks remain priced like it, Kent said.

The one exception is Asia, and even there he cautioned that investors are focusing on the region’s spectacular growth and not on government risk, which showed itself when China slowed visitation to Macau, and in the table game limits imposed in that market.

Among companies, his one buy is MGM Resorts, saying that no new capacity is coming to overbuilt Las Vegas and that MGM has growth potential in Macau.

Kent is neutral on Las Vegas Sands and Wynn.

Otherwise, he is bearish, and would sell slot machine companies, saying there appears to be no replacement cycle; and he is less than enthusiastic about regional casino operators, who are suffering from increased competition while high gas prices and the weak economy hold down revenues.

Greff followed a couple days later with a more sanguine view.

The recovery in Las Vegas appears broad-based, and Macau continues to surprise to the upside, Greff said in raising his targets on MGM to $19 and WYNN to $158.

Greff also noted improvements in the regional markets, citing increasing customer spending per visit in many places, and a subdued promotional environment, which means casinos are not engaged in spending wars to entice customers.

From our perspective, the exuberance over Asia, particularly Macau, should prompt a red flag of caution.

Too many people are bullish and too many, as Kent pointed out, are looking at the revenue growth and ignoring the risk of government policy, such as mainland China’s proven ability to slow down visitation, and the Macau government’s own policy of slowing gaming growth.

Interestingly, good opportunities might not be in the bright lights of the Las Vegas Strip or in Asia, but in less romantic locales, like the American heartland.

Several companies have plans to grow profits, and stock prices haven’t been driven through the speculative roof. Consider:

• Ameristar (ASCA) has bought in shares and is paying down debt to free revenue to the bottom line. There is a concern that new casinos in the Chicago area would slam ASCA’s northwestern Indiana casino.

But Ameristar can grow from expanding jurisdictions by seeking new licenses, too.

Meanwhile, ASCA has cut costs to the point that a large chunk of revenue growth would fall to the bottom line.

• Isle of Capri hasn’t been a growth story for a long time. But that’s about to change as it opens casinos in southeast Missouri and central Pennsylvania over the next two years.

ISLE also has cut costs for potential out-size gains if revenues rise.

• Penn National has its growth pipeline—three casinos total in Ohio and Kansas. And, while its northern Illinois casinos would be hurt by gaming expansion in that state, it might have the opportunity to take advantage of the new expansion law by upgrading its St. Louis-area casino.

(Note: As of this writing, the Illinois gaming expansion bill was still being considered by Governor Pat Quinn, who had hinted he might trim the size of expansion and send the bill back to the legislature.)

• Pinnacle has been driving margin improvement as a way to grow profits even without new revenue, but it also soon will open a casino in Baton Rouge.

And more interesting, the company that began as the owner of Hollywood Park racetrack in southern California will now be 26 percent owner of Ho Tram, a major resort complex rising along the Vietnamese coast.

Each of these companies has challenges to go along with the opportunities.

But for those wary of the excitement of mega-resorts in exotic places, sometimes plain and simple is worth a look.

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