Odds Raised for Casino Profit Shortfalls

When Station Casinos(STN Quote) and Boyd Gaming(BYD Quote) report earnings Tuesday, investors will be looking to see if the Las Vegas casino market is slowing as much as recent reports suggest.

Both stocks have sold off in recent months on fears that Station's new Red Rock casino, which opened to big crowds in April, is creating a competitive operating environment in the Las Vegas locals market located off the Strip. Station and Boyd are the two dominant players in this segment of the market, and Red Rock has been particularly hurting Boyd's Suncoast property, analysts say.

Recent data from Majestic Research show that the Vegas locals market slowed in the quarter, with same-store revenue dropping from a year earlier.

While Station is a pure-play on the Vegas market, Boyd also has casinos in the Midwest, and jointly owns the Borgata in Atlantic City with MGM Mirage(MGM Quote). About 41% of Boyd's revenue comes from the Vegas locals market, with another 12% from its downtown Vegas casinos, which rely more on tourism.

Majestic Research analyst Matthew Jacob says Station's results should be relatively in line with forecasts because Red Rock is performing better than expected. This will offset weaker results at nearby Station casinos that are seeing cannibalized demand from Red Rock, he says.

Analysts, on average, expect Station to report earnings of 63 cents a share for the quarter, down from 65 cents a year ago, according to Thomson First Call. Wall Street targets $342.6 million in revenue.

Boyd, on the hand, may miss analyst estimates, Jacob says. But with the stock already trading at the lowest valuation in the gaming sector, it's not clear how much bad news already is priced in.

"Boyd will probably come in at the low end or miss, but I think the whole world knows that. The stock has been very weak," says Eric Green, portfolio manager with Penn Capital Management, which owns Boyd shares.