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Endangered No More, Casino Gamblers Are Back

20 May 2013 in Trading Ideas

Is it a sign of a healthy economy that the US citizenry has mostly returned to pre-recession levels of donating their hard-earned cash to casino operators?

According to the American Gaming Association industry trade group, casino gaming revenue rose 4.8% in 2012, the industry’s biggest advance since the onset of the Great Recession four years ago.1 Consumers spent $37.3 billion in casinos last year, just below the record haul of $37.5 billion in 2007.

The trade group cited the strengthening US economy and said that growth was strongest in states with new casinos.

This newfound health has likely contributed to the rebound in casino gambling stocks. The Casino Gambling motif is up 15.7% for the past month. It has increased 27.4% in 2013, and has risen 45.7% in the last 12 months.

casino gambling

A significant part of the motif’s investment thesis is that the expansion into new markets is key to the growth for casino operators.

Take New Jersey, for instance, the opposite of a new casino market. While the state lost its No. 2 standing in total state gaming revenue to neighboring Pennsylvania in 2012, hope was offered in late February in the form of New Jersey Gov. Chris Christie approving an online gaming bill. Shares of companies with casino operations in Atlantic City, such as Caesar’s Entertainment and Boyd Gaming, were boosted on the news.2

However, while states continually risk cannibalizing each other’s operations, major casino operators have realized for some time now that China is essentially the only growth market that matters.

In late March, RBC analyst John Kempf raised his earnings expectations on four stocks – Las Vegas Sands, Wynn Resorts, Melco Crown and MGM Resorts – due to higher projections for their performance in Macau, the coastal Chinese city that functions as the Mecca of Asian gambling.3

“The Chinese middle class continues to grow and continues to use their leisure dollars to go to Macau,” Kempf explained to CNBC. “The infrastructure in Macau is improving, and the city has added hotels rooms, making it easier for gamblers to stay the night.”

Kempf noted that Las Vegas Sands and Melco Crown derive nearly all of their pretax profit from Macau casino operators.

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Sounding a note of caution against continued Macau hyper-growth, money manager Harold Vogel told CNBC that China is “running on empty” and that Macau is vulnerable to competition from nearby Asian countries such as the Philippines and Singapore.

However, competition doesn’t necessarily mean less money for major casino operators, just that it may start coming in more currencies.

1Christopher Palmeri, “Casino Gambling Surges Most Since Crisis,” Bloomberg.com, May 6, 2013, http://www.bloomberg.com/news/2013-05-06/casino-gambling-surges-most-since-crisis-to-approach-peak.html, (accessed May 16, 2013).

2James Detar, “Casino Stocks Rock On New Jersey Online Gambling OK,” Investors.com, Feb. 27, 2013, http://news.investors.com/business/022713-645957-caesars-boyd-lead-broad-casino-stocks-surge.htm, (accessed May 16, 2013).

3Alex Rosenberg, “The Big Bet that Could Propel Casino Stocks,” cnbc.com, March 27, 2013, http://www.cnbc.com/id/100596898, (accessed May 16, 2013).