Four Casino Stocks: How to Bet This Earnings Season

As casino operators report first-quarter earnings, winning bets may be hard to come by. Here's how to play your hand.
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NEW YORK (TheStreet) -- Don't bet on a recovery from the casino sector in the first quarter.

While trends are stabilizing, they are nowhere near returning to positive territory. And gambling, the most discretionary of the discretionary segments, will need to see a clear upswing in the job market before a turnaround can take place, according to analysts.

"We expect trends to be down for the year unless something substantial and surprising happens," says Keith Foley, senior vice president of Corporate Finance at Moody's Investor Service. "We don't even think the sector has hit bottom yet, but it is getting close. There is no data that a recovery is in place. There is even a chance that 2011 still won't be a good year."

As casinos release first-quarter earnings reports over the next week, investors will be closely eying U.S. domestic travel, as well as trends in the group and convention business. Of course, Macau will also be the center of attention, as investors anxiously await how the Chinese gambling enclave will fare once it is up against tougher comparisons toward the end of the year.

While casino stocks have seen strong returns in the first-quarter, with KeyBanc's gaming index up 15.6% for the period, analyst Dennis Forst recommends waiting on the sidelines for a more attractive entry point.

"We continue to take a wait-and-see approach as to the positive group momentum and psychology and would likely become more constructing on shares if stock prices retreat with a market correction or disappointing consumer economic news," he wrote in a note. "We are much less negative on the group than we were six months ago, but are still concerned that much of the move in stock prices is more than fundamentals currently warrant."

So far

Penn National Gaming

(PENN) - Get Report

and

Pinnacle Entertainment

(PNK) - Get Report

have reported their first-quarter earnings reports.

Penn saw an 11% drop in profit to $36.2 million, or 34 cents a share, beating Wall Street's estimates of 23 cents a share. Revenue fell 3% to $592.3 million, which missed expectations of $602.8 million.

The regional casino operator upped its full-year outlook to $1.13 a share, from previous guidance of $1. Analysts are calling for earnings of $1.07 a share.

Pinnacle surprisingly swung into profit in its first quarter, earning 7 cents a share on an adjusted basis, significantly better than estimates of an 11 cent loss.

Both companies, along with other regional gamers, were hurt in the fourth-quarter by aggressive marketing campaigns. "For Penn and Pinnacle, the fourth quarter marked a trough for expenses," says Telsey Advisory Group analyst Chris Jones. "Both spent the past few months on expense control, which they lowered dramatically." As a result, margins have significantly improved.

While Penn provided forward-looking guidance, most of the companies in the sector do not reveal these numbers. Therefore, Forst says it's essential to listen to the tone of conference calls for any color on competitive conditions, pace of development and cost controls.

Here's what you can expect from the major casino players in the first-quarter...

MGM Mirage

MGM Mirage

(MGM) - Get Report

already pre-announced a first-quarter loss that will miss analysts' forecast. The Las Vegas-based casino operator said earlier in the month that it expects to record a loss of $96.7 million, or 22 cents a share, a penny off Wall Street's predictions.

Last year, MGM posted a profit of $105.3 million, or 38 cents a share, in its first quarter. The company said this year's results include a gain from debt extinguishment of $142 million, or 21 cents a share, and a charge of $86 million, or 13 cents a share, from impairments related to residential inventory at its CityCenter development.

Even as visitation shows some signs of improvement, the Las Vegas Strip continues to suffer, especially as supply grows with the recent opening of CityCenter. "It looks like CityCenter is cannibalizing MGM's other properties on the Strip," says Peggy Holloway, senior credit officer at Moody's.

Mandalay Bay, for example, was especially weak in the first quarter, as were lower-tier properties like Luxor and Circus Circus.

Las Vegas Sands

While

Las Vegas Sands

(LVS) - Get Report

is experiencing the same pangs as MGM at its Las Vegas casinos, this reality will most likely be overshadowed by strength in Macau.

Still, an even bigger focus will be on Sands' Singapore casino, which opened this week. The $5.5 billion Marina Bay Sands development launched the first stage of its complex on Tuesday.

Sands expects to earn back it investment in five years and predicts the casino will rake in $1 billion annually in gross profits. "Going forward Singapore could be a potential home run for them," Foley says.

The company's Pennsylvania location is also expected to post a solid performance in the first-quarter, and could continue to gain momentum as table games are added to the Bethlehem facility this summer.

Wynn Resorts

Like Sands,

Wynn Resorts

(WYNN) - Get Report

is more heavily weighted toward Asian gaming. Its significant exposure to VIP market in Macau, which is driving much of gaming, will be a boost for the company, Jones says.

The company opened its $600 million Encore casino in Macau, which will cater to the VIP segment, earlier this week, and revealed plans to build another location in the area next year.

Wynn even said that it is looking into relocating its headquarter from Las Vegas to Macau, another sign of its push to expand in the area.

But with Macau proposing restrictions on the number of non-residential workers on construction projects, casino developments going forward could be disrupted.

Wynn is scheduled to report its first-quarter earnings after the close today.

Boyd Gaming

Don't expect much from

Boyd Gaming

(BYD) - Get Report

in the first quarter, as the local Las Vegas market is still clearly in a recession.

Indeed, the company isn't expected to see a meaningful improvement until visitation and room rates in Vegas rebound.

For regional players, like Boyd, it will also come down to how much they were able to reduce promotional and operational costs, Forst says.

Much of Boyd's focus as of late has been on vying for assets from bankrupt

Station Casinos

. Boyd opposed a bankruptcy plan presented by Station, which is said will make the properties less valuable to the buyer.

Boyd has made several bids for the assets, all of which have been rejected.

The company is scheduled to report earnings on May 4. Analysts are calling for a profit of 7 cents a share, on revenue of $409.5 million.

-- Reported by Jeanine Poggi in New York.

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