(Casino preview updated with Ameristar Casinos results.)
NEW YORK (
) -- Let's be honest, any real surprises within the casino sector in the second-half of the year will almost surely come from Asia. As it stands, the U.S. domestic market appears to have little luck left.
Because while the risk for U.S. casino hotels has subsided from its peak in 2009, it remains at unsettling levels. IBISWorld holds a risk rating of 5.02 for the sector into 2011, which compares with 6.5 last year. The economy as a whole currently has a risk score of 6. IBIS measures risk across sectors, with 1 being the least risky and 9 having the most risk.
Casino stocks have been fickle over the second quarter, plummeting in May as the euro and other macro-economic concerns weighed on the sector. Since then there has been a significant rally, and these stocks, for the most part, have normalized.
The second-quarter was spent attempting to offset some of the declines in consumer spending seen over the past year by lowering costs and restructuring balance sheets. "But these are all band aids," says Alex Calderone, who provides turnaround and crisis management services for the gaming sector at Conway MacKenzie. "If a true economic rebound doesn't take place within the next 12 to 18 months, we will see casinos start to shutter. There is a runway that exists, but the plane needs to get up in the air before that runway ends."
Try Your Luck with LVS: China Watch
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Calderone says two things have to happen before a casino recovery: employment growth and a rebound in the housing market, which makes a near-term recovery unlikely.
Las Vegas, once the epicenter of the gaming world, is losing its glimmer. Nevada has the highest unemployment rate in the nation and the housing decline in the state is among the worst in the country. Convention business, which makes up a significant chunk of revenue on the Strip, is seeing an uptick in booking and the ability to modestly increase room rates, Calderone observes. But with the possibility of even more supply in the pipeline with the pending opening of Cosmopolitan in December, this doesn't bode well for revenues.
Analysts are predicting that it will be well into 2011 before a real recovery is evident in Las Vegas. This means stocks with significant exposure to Nevada are especially susceptible.
When it comes to the regional markets, the next half of the year should sound very similar to outlooks heard at the beginning of the year. Some markets, like Atlantic City, are feeling pressure from new competition. As some regions get richer, others are getting poorer. All of which makes Asia, specifically Macau and Singapore, the only real source of growth potential.
"The proverbial rising tide that lifted the gaming sector has come and gone," Calderone says. As such, it is becoming increasingly more important for investors to pay attention to the fundamentals of individual casino companies, rather than buy into the sector as a whole on any sign of a potential rebound.
Given this, here is a breakdown of which casino stocks are worth a bet in the second-half, and which you should fold....
was singing "St. Louis Blues" as it swung to a loss in its second quarter.
The casino operator faces significant pressure in St. Louis from
new River City property, which opened in March.
During the quarter, Ameristar lost $24.9 million, or 43 cents a share, compared with a profit of $14.3 million, or 25 cents, in the year-ago period.
Excluding a negative impact related to Ameristar's casino in East Chicago, Ind., where a bridge that is closed is impacting revenue, it earned 13 cents per share, still less than the 20 cents analysts' estimated.
Revenue dropped 5% to $293 million from $308.9 million.
"While Ameristar is cheap on a relative valuation basis, we believe competition and challenges in East Chicago, coupled with a lack of visible positive catalysts, will keep the stock range-bound in the near to mid-term," J.P. Morgan analyst Joseph Greff wrote in a note.
Las Vegas Sands
Las Vegas Sands
would be a losing bet. The casino operator reported second-quarter earnings that significantly beat expectations, as revenue soared, but all of its properties outside of Asia missed estimates.
During the quarter, the company lost $4.7 million, or a penny a share, compared with a loss of $222.2 million, or 34 cents in the year-ago period. Excluding items, Sands said it would have earned $129.3 million, or 17 cents a share, easily topping the consensus Wall Street estimate of 9 cents a share.
Revenue surged 51% to $1.59 billion, in-line with forecasts. A majority of the growth came from Asian markets like Macau and Singapore, as Sands China saw revenue climb 41% to $1.03 billion.
Sands opened its first casino in Singapore in April. In its first 65 days of operation, the $5.7 billion Marina Bay Sands generated $94 million in earnings before interest, taxes, depreciation and amortization. In comparison, Las Vegas EBITDA dropped 15% to $66 million from $78 million in the second quarter last year.
Chairman and CEO Sheldon Adelson still expects the Singapore resort to rake in $1 billion in EBITDA next year. "We have a group of Koreans flying in every week," he said during a conference call. "I think that the outer reaches of our marketing radius is wider than what we thought."
Sands is also looking to expand further in Macau, with two sites on the Cotai Strip that haven't started development yet.
Still, the Asian market isn't without its drama. Last week, the company announced the departure of Sands China CEO Steve Jacobs'. While Sands did not provide a reason for his termination, it shouldn't come as much of a surprise. Speculation has arisen over disagreements between Las Vegas Sands Chairman Sheldon Adelson and Jacobs, and it follows the departure of executive director Stephen Weaver earlier in the year, who resigned due to personal reasons.
The company quickly appointed Edward Tracy as president and chief operating officer, and David Sisk as executive vice president and chief casino officer.
saw its second-quarter profit more than double, but most of that strength came from casino wins, and investors were unimpressed.
During the quarter, the casino operator earned $52. 4 million, or 52 cents a share, on revenue of $1.03 billion, higher than forecasts of 42 cents on revenue of $992.3 million. This compares with a profit of $25.5 million, or 21 cents, on revenue of $723.3 million, in the year-ago period.
Wynn had already pre-announced disappointing results for its Las Vegas properties, citing higher costs, including employee health care and benefits, and marketing expenses. Its operating loss for its Wynn Las Vegas and Encore widened to $17.2 million from $8.3 million last year. Revenue rose 1.7% to $318 million.
Occupancy at the Wynn Las Vegas jumped to 92.6% from 86.6% a year earlier, but revenue per available room fell 3.2%.
Still, management indicated that there is a slight improvement on the Strip, with an increase in forward group bookings and some bright spots for the ability to yield rates. But management tempered enthusiasm by saying there are some struggles and uncertainty in the marketplace.
"We hope for continued improvement in Las Vegas or -- let me put it different, we hope that we'll get smarter in Las Vegas in dealing with the peculiarities of this market --and this very, very mercurial, national economic market we're living with," said Steve Wynn, chief executive, in a conference call. "The national economy and the political environment in the country as we head up to the elections
is very, very touchy. And it is impacting all businesses."
The biggest boost, of course, came from Macau, where revenue surged 74% to $714.4 million from $410.4 million last year.
The company opened its Encore Macau in the spring, boosting its market share to about 16% from about 13%, Sterne Agee analyst David Bain wrote in a note.
Wynn is in the process of working on a new development on the Cotai strip, which should spike investors' interest as more details are revealed in the coming quarters.
Still, investors are concerned that as comparisons get harder in Macau, and second-quarter results are adjusted for hold (how much the casino won), Wynn may not be able to outperform. But Bain reassures, "this has been discussed as nauseam by investors, sell-side analysts, the press -- and even dinner-table relatives -- for some time. We believe the Street is underestimating the summer months in Macua, which may help to produce a new leg up for Macau stories, with Wynn being the most profitable on a per position basis."
MGM Resorts International
has the most exposure to the Las Vegas market, making it a bet only for those with thick skin.
For the second quarter, the casino operator lost $883.5 million, or $2 a share, compared with a loss of $212.5 million, or 60 cents, in the year-ago period.
A majority of the loss was attributed to a $1.12 billion writedown on its investment in CityCenter in Las Vegas. This is the third time MGM has had to write down CityCenter, as the casino has seen little improvement in operating profit since it opened in December. The $8.5 billion development took a loss of $128 million.
Excluding this writedown, MGM actually lost 35 cents a share, still significantly more than analysts estimates of a 24-cent loss. MGM's revenue rose 3% to $1.54 billion from $1.49 billion, ahead of analysts' estimates of $1.46 billion.
Revenue-per-available room on the Las Vegas Strip decreased 2%, although Bellagio and MGM Grand showed improvement, the company said. Occupancy levels slipped to 93% from 94% while the average daily rate fell a dollar to $110. "The Las Vegas operating environment remains difficult, but as we expected, we are seeing a gradual recovery," Chief Executive Officer Jim Murren said in a statement.
Some of MGM's losses in Las Vegas were offset by its joint venture in Macau with Pansy Ho. MGM Macau earned $40 million, compared with a loss of $8 million last year
Outside of Vegas, MGM said last week that it agreed to sell land from its Borgata hotel in Atlantic City for $73 million to
Vornado Realty Trust
. The Borgata land, which is co-owned with
, is about 11.3 acres, which would translate into about $6.5 million per acre.
The transaction still needs to be approved by New Jersey regulators, and is expected to close by the fourth quarter. Once this transaction is complete, MGM will still own about 85 acres of developable land in Atlantic City.
Earlier in the year, MGM said it planned to divest its 50% stake in the Atlantic City casino, which is currently in trust. The casino operator is still in talks with potential buyers of Borgata casino, and hotel and investors will be waiting for an update on its progress when second-quarter earnings are released.
"We view this
deal as a very modest positive in that there are still buyers of Atlantic City assets out there, at least at the right price," J.P. Morgan analyst Joseph Greff wrote in a note. "We don't necessarily interpret
the news as any indication that MGM is closer to selling its 50% stake in Borgata."
Penn National Gaming
Penn National Gaming
squeaked past its guidance through improved cost controls, and investors praised its efforts.
But expectations were low, and its upbeat outlook shouldn't be viewed as a message that regional markets are recovering. "Going forward, we project soft regional gaming revenue results over the next three to six months, as we do not expect to see a significant increase in consumer spending patterns given the uncertain economic environment," J.P. Morgan analyst Joseph Greff wrote in a note.
Penn National raised its full-year earnings guidance to $1.18 from $1.13 a share, and up its revenue outlook by $26 million to $2.44 billion from $2.41 billion.
During the second quarter, the company earned $9.2 million, or 9 cents a share, compared with $28.5 million, or 27 cents, in the year-ago period. Excluding items, Penn actually earned 29 cents a share, a penny higher than estimates.
Revenue rose 3% to $598.3 million, higher than the $597.1 million Wall Street projected. The upside was driven by both better revenues and margins and was generally broad-based across many properties, especially larger venues in Charlestown, Lawrenceburg and Grantville, Pa.
Penn National rolled out table games in West Virginia and Pennsylvania during the quarter, which should be a growth catalyst moving forward. The company also plans to open a slot facility in Maryland on Sept. 30 and expects its Toldeo, Ohio, location to open in the first-half of 2012. Its Columbus project is slated to open in the second-half of 2012.
The company repurchased 409,000 shares during the quarter. "
This sends a message to investors on the value of its equity, but perhaps indicating the lack of near-term acquisition opportunities," J.P. Morgan analyst Joseph Greff wrote in a note.
posted a bigger-than-expected drop in its second-quarter earnings, citing weak performance in Las Vegas, the Midwest and the South.
During the quarter, the casino operator earned $3.4 million, or 4 cents a share, a 73% plunge from $12.8 million, or 15 cents, in the year-ago period. Adjusted earnings came in at 5 cents a share, significantly lower than the 10 cents Wall Street predicted for Boyd.
Boyd's revenue fell 6% to $578.4 million, also short of the consensus of $588 million.
"The lingering effects of the recession have left consumers unusually sensitive to shifts in the economy, and they now react more quickly to economic data and other developments, such as fluctuations in the stock market," said CEO Keith Smith, in a statement. "Although conditions remain uncertain, we believe long-term stabilizing trends are still in place, and that year-over-year growth is achievable by the end of 2010."
In the Las Vegas locals market, the rate of decline in earnings before interest, taxes, depreciation and amortization rose to 16.2% from 10.8%, J.P. Morgan analyst Joseph Greff wrote in a note. Boyd previously reported a 9.9% decline for its Borgata property in Atlantic City. Revenue came in at $186.9 million, a 2.4% decrease from the year-ago period.
"We think second-quarter results are less important than the coming operating results in the second-half of 2010, when the Atlantic City market faces increased regional competitive pressures from tables in Pennsylvania and West Virginia and the first Philadelphia casino opens this summer," J.P. Morgan analyst Joseph Greff wrote in a note.
Greff reaffirmed his underweight rating on Boyd, given increasing competition in Atlantic City, a weak recovery in the Las Vegas locals market and stagnant regional gaming trends.
While there is no doubt the Atlantic City gaming market remains one of the most depressed, Borgata continues to dominate the market and gain share. Atlantic City saw gaming revenues plunge 11.1% in June to $286.8 million. Boyd co-owns Borgata with MGM Resorts, which is currently in the process of divesting its 50% stake.
Melco Crown Entertainment
Melco Crown Entertainment's
second quarter had some distractions, but overall there appear to be some underlying improvements.
During the quarter, the Macau-based casino operator lost $30.1 million, or 6 cents a share, compared with a loss of $144 million, or 30 cents, in the year-ago period. Analysts were calling for a loss of 4 cents a share for Melco.
Revenue surged to $573.6 million from $215.8 million last year. Melco received a boost from improvements at its Altria casino, and by having a full quarter of earnings contribution from its City of Dreams flagship.
Melco shares took a hit after the report. Melco said earnings should be adjusted for $9 million non-recurring provision and theoretical hold.
"This and a few other quarterly reports from Melco have come with an explanation, such as above, and our sense is that some investors are fatigued by that," Bain wrote. "We believe investors are being overly punitive to shares based on issues that have historically plagued results to a much larger degree.... We believe Melco's earnings are much less influenced by hold and other variables than they previously were."
Melco also announced that Greg Hawkins, president of its flagship City of Dreams casino resort, has resigned, and that the company will restructure its management, creating co-chief operating officers positions.
Ted Chan, president of the company's Altira Macau property, has been promoted to Co-Chief Operating Officer of Gaming, and will oversee gaming activities. Nick Naples, formerly Consulting Executive Vice President at Sands China, has been named Co-Chief Operating Officer of Operations and will manage all non-gaming operating activities for the company.
Both will report to Lawrence Ho, son of casino magnate Stanley Ho, and Co-Chairman and Chief Executive Officer at Melco.
swung to a loss in its second quarter, as costs rose.
During the quarter, the regional casino operator lost $49.3 million, or 81 cents a share, compared with a profit of $4.7 million, or 8 cents, in the year-ago period for Pinnacle.
Excluding items, Pinnacle actually lost 14 cents a share, 10 cents worse than analysts' estimates of a 4-cent loss.
Pinnacle's revenue rose 8.5% to $273.6 million from $252.3 million, but also fell short of Wall Street's forecast of $284.4 million.
Even though revenue was weaker, margins rebounded at all but one of Pinnacle's properties. "Margins are the story for Pinnacle ahead of any longer-term potential true rebound in the economy, and we continue to believe there are multiple opportunities for near-term operational improvements across the Pinnacle portfolio," Bain wrote in a note.
At a time when most casino operators are striving to reduce costs to offset the decline in consumer spending, Pinnacle saw expenses rise 21% to $289.3 million. But Bain said Pinnacle is still in the early stages of cost-refining. "Given what we view as several areas of potential improvements in this regard, we believe Pinnacle is less dependent on an economic recovery than some of its regional peers," he wrote.
J.P. Morgan analyst Joseph Greff also reaffirms his overweight rating on the stock, viewing Pinnacle as a transition story. "We continue to believe that new CEO Anthony Sanfilippo and team will drive increased operating efficiencies and allocate capital prudently," he wrote in a note.
Greff praises Sanfilippo for shelving the Sugarcane Bay project and instead focusing on Baton Rouge.
Pinnacle's liquidity remains strong, with $200 million in cash and $375 million of availability under its revolver
-- Reported by Jeanine Poggi in New York.
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