When Will Casinos Snap Their Losing Streak?

A tough economy and steep fuel prices are hurting Las Vegas and other casino areas. Relief might not come anytime soon

by Ricky McRoskey

Casino operators have been rolling snake eyes this year. In the U.S., would-be gamblers, hit with higher gas prices and rising unemployment, are nixing their Las Vegas vacations this summer, and some gaming companies are being forced to delay expansion plans or file for bankruptcy amid the credit crunch. And things have gotten dicey overseas: Reports that the Chinese government might restrict visits to Macau, a gaming hotbed where U.S. operators such as MGM Mirage (MGM), Wynn Resorts (WYNN), and Las Vegas Sands (LVS) have significant properties, depressed the share prices of those outfits on Aug. 20.

And that's just the latest manifestation of the sector's losing streak. Since the beginning of 2008, the Standard & Poor's Casinos and Gaming Index is down 36%.

Some Regions Are Winners

A bounce-back for the beleaguered industry is not a sure bet. Shareholders in MGM Mirage, for instance, which owns gaming resorts like the Bellagio and the MGM Grand, saw the company report a 69% decline in second-quarter earnings in August. To boot, rival Las Vegas Sands posted an $8.8 million loss for the second quarter because of high borrowing costs and more competition in Macau.

Of course, there are brighter spots, as some particular regions have been more successful than others. While Las Vegas-centric casino companies have suffered from tepid tourism recently—hotels in the city saw a 2.4% drop in total occupancy levels and a 5.5% decline in average daily rates in May from a year earlier, according to a recent Las Vegas Convention and Visitors Authority report—some regional casinos have fared better. In Iowa, which houses casinos from industry players like Isle of Capri (ISLE) and privately owned Harrah's, gaming revenues were up 1.5% in July, to $126 million, according to research from Banc of America Securities.

"While in the Midwest you've seen manufacturing and the auto industry falling off, farmers are doing really well," says Esther Y. Kwon, an S&P analyst for the gaming industry. "So when you're looking at casinos you should look at them on a regional basis." (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

Also, those operators with more global diversification have seen some success internationally. For the second quarter, Wynn Resorts saw a 50% spike in revenue for its Macau casino, helping the $2.6 billion-revenue company more than triple its earnings, to $272 million.

Casino Entertainment Takes a Hit

But analysts see a lot of pain ahead for the industry. The recent report from a Portuguese news agency that the Chinese government may allow travelers to visit Macau on visa only once every six months, compared with the previous restriction of three months, prompted Standard & Poor's to reiterate its strong sell opinion on Las Vegas Sands stock. Shares of the company slipped over 8% on Aug. 20.

Another source of agony for major gaming operators has been recent casino smoking bans in states ranging from Colorado to New Jersey, which may have put a crimp in casino traffic as smoker-gamblers opt to play where they can smoke—often at nearby Indian casinos that are exempted. "We know historically that when no-smoking laws go into effect, that means about a 20% immediate downturn in casino revenues," says Frank Fahrenkopf, president and CEO of the American Gaming Assn..