Casinos Are Recession-Proof? Don't Bet On It

Gaming-supply stocks have not fared well either. ShuffleMaster (SHFL - commentary - Cramer's Take) is off 70%, as the profit margins of its equipment and table games have come under pressure. The leading slot-machine manufacturer, International Game Technology (IGT - commentary - Cramer's Take) has seen its stock price fall better than 35%. In addition to a general slowdown in business, lower interest rates increased the cost of paying off annuitized jackpots. Even the lottery is feeling it, as lottery supplier Scientific Games (SGMS - commentary - Cramer's Take) has fallen 23%.

In spite of the carnage in stock prices, investors bottom-fishing this group are probably drawing dead right now. Even the higher-end consumer has been cutting back discretionary spending. Given the current weak economy and housing crisis, a vacation is the last thing on the minds of most Americans. When it is a struggle to meet the mortgage and the grocery bill is climbing every week, most are not thinking of a visit to a casino.

High fuel costs are also restricting travel, and McCarren Airport in Vegas has cut back on the number of daily flights as a result of the decline. In addition to the troubled economy in the United Sates, Macau is now facing a likely reduction in revenues as well. Ninety percent of gamblers visiting the gambling haven are for mainland China. In an effort to cut down on gambling losses by its citizens, the Chinese government has sharply restricted travel to Macau.

The stocks are not really cheap at these levels either. Only Boyd Gaming (BYD - commentary - Cramer's Take) and MGM trade at single-digit price-to-earnings ratios. Both are also in the midst of expensive development projects involving heavy borrowings, and it will be some time before earnings improve.

The group leaders, Wynn and Las Vegas Sands, trade at multiples reminiscent of the heyday of the Internet stock boom. Pinnacle Entertainment is the cheapest stock in the group, trading well below tangible book, but escalating costs from its new St. Louis casino project have limited its ability to grow earnings in the immediate future.

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At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.