Weak economy trumps casino stocks

Investors who bet on companies that offer gambling in Las Vegas aren't used to losing money.

Historically, Vegas has been relatively immune to the problems that plague the broader economy. Last year, for instance, while the rest of the economy was starting to crack, shares of the largest Las Vegas casino operator, MGM Mirage mgm, gained 47%, and that after a 56% gain in 2006.

But now the realities of a slower economy are starting to affect Las Vegas, and that's bleeding into the casino operators' stocks. Higher energy costs, which translate into pricier flights and drives to Las Vegas, and less-confident consumers have injured gaming stocks — and stripped their traditional reputation as havens in tough times.

"The credit crunch and housing crisis have been a double whammy that really hit the consumer and, in turn, hit discretionary spending for gaming," says Tom Marsico, portfolio manager at Marsico Funds.

The latest evidence came Monday, when Tropicana Entertainment, the privately held operator of the Tropicana casinos in Las Vegas and Atlantic City, filed for bankruptcy protection. MGM, the largest publicly traded casino, also shows the pain. The stock is down 38.3% this year, on track for its largest annual decline since it started trading in 1989.

Factors behind the problems for Vegas include:

•Falling room rates. To keep visitors coming and to help defray the higher travel costs, Las Vegas casinos have been slashing room rates, says Robert LaFleur, analyst at Susquehanna Financial Group.

Average room rates are down as much as 15% from last year, he says. The average room rate was down 5.1% in February from a year earlier, the latest official data available from the Las Vegas Convention and Visitors Authority. Even a small decrease in room rates has a direct effect on how much casinos earn. Traditionally, casinos make 70 cents of every $1 in room charges, but that margin is being eaten into by the lower room rates, LaFleur says.

Room rates are critical because Las Vegas has become more of a full-service resort and less of a quick stop for hard-core gamblers. That means room rates have been an increasingly big piece of profits. Las Vegas casinos get 58% of their revenue from things other than gaming, including room charges, says Esther Kwon, stock analyst at Standard & Poor's. "The business is more about non-gaming amenities," says Joel Simkins, analyst at Macquarie Securities.

•More competition. Las Vegas gaming operators used to have a near monopoly. But the rise of Native American casinos and other gaming alternatives, such as horse-racing tracks with slot machines, have given gamblers other options. The number of slot machines in North America has ballooned from 150,000 in 1991 to 900,000, Simkins says.

Gaming revenue in the Las Vegas area, including the Strip, fell 4.1% in February, says the Las Vegas Convention and Visitors Authority. "You see more competition, and it will just increase," Kwon says.

•Difficulty accessing capital. The credit crunch has hammered Las Vegas, especially new projects. At least two new projects on the Strip have halted, Kwon says. That includes the Cosmopolitan, a casino being built near MGM, which is stalled as developers negotiate with lenders, Kwon says. Another development, The Plaza, being built on the site of the former Frontier, is also shelved.

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