Casino stocks: Are they a good bet?

Q: Are casino stocks cheap or expensive at current prices?

A: The slowing economy and plunging stock market seem to be taking the gambling bug out of investors.

Shares of companies that run casinos, including those with well-known properties on the Las Vegas Strip, have been among the worst performers in the bear market.

Shares of MGM Mirage (MGM) were down 87% through Wednesday, while Las Vegas Sands (LVS) shares were down 94% and Wynn Resorts (WYNN) stock was off 67%.

The casino operators are facing a litany of well-documented problems. The problems started when oil prices spiked and caused airlines to fail or reduce service to Las Vegas, resulting in higher fares.

Usually Las Vegas can make up for that by courting visitors from Southern California. But higher gasoline prices made the drive more costly, and the rise of Native American casinos in California is diverting traffic from Vegas.

And things only got worse. The housing meltdown in Las Vegas hurt many residents, which hurt the "locals" gambling marke, just as the housing meltdown nationwide, rising unemployment and weak consumer confidence further reduced the willingness to gamble.

With the Dow Jones industrial average jumping or falling by triple digits daily, why gamble in Vegas?

Finally, the credit crunch has been brutal for Las Vegas. Several building projects have been stalled as builders have trouble getting loans to complete construction. And casinos face more challenges servicing their debt as visitors dry up.

With all these concerns, it's clear the value of casino stocks needed to be brought down to match the new reality.

But to address your question, what are the valuations? Investors generally decide whether a stock is expensive or cheap based on the price-to-earnings ratio, or P-E.

The P-E can be measured many ways, but here are the numbers from Standard & Poor's Capital IQ, based on the casinos' earnings the past 12 months. The industry average is 10.4:

Wynn Resorts, 15.5; Las Vegas Sands none, it lost money; MGM Mirage, 4.1.

If you've got money you can afford to lose, and you've done your research, you could bet on rebound. But when?

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.

Join the Discussion
blog comments powered by Disqus
 
You Might Also Like...