Looking out over the next several decades, I believe the casino industry will do very well. After all, gambling is one of the major pastimes in this country. In addition, increasing populations and wealth, for that matter, could certainly fuel demand at existing facilities. But this does not mean that I think this is the best entry point for gaming stocks.
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The Big Picture
We are starting to see signs that the economy is turning. On August 3, positive ISM and construction spending numbers were released. In addition, the surging stock market is bound to fuel some spending. But make no mistake, gamblers won't be flooding Las Vegas, Gulf or East Coast casinos in the very near future. In fact, the fragility of this recovery - and the fact that many individuals are still down big on their stock market and real estate holdings - will likely cause the average individual to be leaps and bounds more cautious today than a few short years ago.
The Cloudy Earnings Picture
The earnings results of the past quarter were clearly nothing to write home about. Wynn Resorts (Nasdaq:WYNN) earned 9 cents per share excluding items in its Q2. That was much better than the 1-cent loss analysts had forecasted. However, it's hard to get too excited mainly because Wall Street expects Wynn will lose 32 cents this year, and because the stock trades at a lofty $56 and change. I think The Street is pricing in a huge bounceback in gaming, and if it doesn't happen, the shares could get hit hard.
MGM Mirage (NYSE:MGM) is a company that I respect very much and one whose facilities I have frequented over the years. It released its Q2 results earlier this week. According to Reuters: "Excluding items, the loss came to 12 cents a share, while analysts on average had expected a loss of 9 cents." To be clear, the shares did fare well the day the news was released, mainly I assume because it exceeded revenue expectations. But again, there's little to cheer about here as sizable losses are expected in 2009 and 2010.
Excluding items, Las Vegas Sands (NYSE:LVS) generated a penny in its Q2. That was ahead of the penny per share loss Wall Street analysts were expecting. But overall, I wasn't too impressed. With exposure to Sin City (including The Venetian and The Palazzo), I'm not convinced that a major comeback is just around the corner. For the record, analysts expect it to post meager profits of 3 cents this year and 20 cents a share in 2010. For a stock that presently trades in the double digits, my interest is hardly piqued.
That said, one company that I am a little more positive about is Vegas-based Boyd Gaming (NYSE:BYD). Analysts are expecting the company to earn 12 cents when it releases its Q2 earnings August 5. To be clear, I'm not entirely certain if it will hit that number. But I am impressed that the company is expected to earn 43 cents this year and 54 cents next year.
The Catalyst?
For casino stocks in general to really gain steam from these levels, the group will need to beat earnings expectations consistently going forward and prove to the Street that meaningful profits are just around the corner. Improvements in the stock market, real estate and job numbers will probably be needed, too, as these factors will fuel the demand for gambling.
Bottom Line
I think that casinos in general have a very bright future in this country. But near-term, the cloudy earnings picture leads me to believe that a better entry point may lie ahead.
For more, see 4 Characteristics Of Recession-Proof Companies.
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