When Will Casinos Snap Their Losing Streak?

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Casino resorts have evolved from being primarily gaming centers, with blackjack tables and slot machines, to multifaceted resorts with restaurants, spas, and golf courses. That means operators' gaming revenues—which are considered less prone to economic cycles than other forms—now play second fiddle to sales from retail shops and food services. According to S & P, roughly 60% of revenue for gaming companies comes from such nongaming areas.

"Now Las Vegas has become an entertainment capital with a broader audience who enjoy things like Broadway shows, shopping, and dining," says S&P's Kwon. "And that is a lot more sensitive to economic downturns." According to the American Gaming Assn., a 2006 study found that 55% of national casino visitors most enjoyed "the food, shows, entertainment, and everything else," and only 20% preferred the gambling itself.

Wait-and-see approach

Higher fuel prices are compounding the misery, pushing several major airlines like U.S. Airways (LCC) and Delta (DAL) to cancel selected routes to Sin City. "Both auto and air traffic continue to be weak in the Las Vegas Area," said Goldman Sachs (GS) analyst Steven Kent in an Aug. 10 note. "Air traffic could see more pressure near term as additional capacity cuts from airlines go into effect." During the second quarter, visitor traffic to Las Vegas was down 0.5% from the previous year. Says Fahrenkopf of the American Gaming Assn.: "The fuel equation has been the one that's hurt the most."

Pinpointing when gaming stocks reach bottom will hinge on a rebound in consumer confidence and lower fuel prices, say analysts. For those companies dependent on Las Vegas, many analysts are taking the wait-and-see approach that Wachovia analyst Brian McGill applies to MGM Mirage. "While management seemed optimistic about fourth quarter 2008 bookings improvements in Las Vegas and the outlook for 2009, we continue to have a more cautious view" based on airline cuts and the soft consumer environment, said McGill in a note.

One other key signal will be when casino operators return to expansion mode. Other things that investors should look for are the eventual revitalization of the financing that went behind casino expansions such as Boyd Gaming (BYD)'s $4.8 billion Las Vegas resort, Echelon Place. But it seems that casino operators may be taking the same wait-and-see approach: In August, Boyd pushed back the 87-acre resort's opening by three to four quarters because of the "current economic climate."

McRoskey is an intern at BusinessWeek.com.