While the U.S. and portions of the world economy are
improving, casino operators face more head winds in early 2013
than they did a year ago.
Experts remain upbeat, particularly in the U.S., where the
gaming industry is expanding as more states embrace their
gambling options and number of facilities.
But fourth-quarter results so far show a heated brawl under
way for market share in Macau, a special administrative district
near Hong Kong and the only area of China that permits
Casino owners, based in the U.S. and elsewhere, continue to
add capacity at a breakneck pace, in spite of signs that Macau's
white-hot growth of the past several years has hit the brakes.
The region's gross gambling revenue in 2012 rose 13.5%
year-over-year, down from 42% growth the prior year.
China's economy last year experienced its slowest rate of
growth in 13 years. This could mean increasing friction for
Macau, if China's gambling enthusiasts get nervous about spending
money on travel, slot machines and hotel rooms.
A leading concern: a decline in spending by VIP customers, who
account for about 70% of Macau's total revenue.
"The VIP market has deteriorated slightly, and people are
watching to see if there is something wrong with the nature of
the way business is conducted," said Warwick Bartlett, chief
executive of Global Betting & Gaming Consultants (GBGC), a
U.K.-based researcher and consultant.
"They are also watchful of the Chinese economy," he added.
"The VIP market comes from small- to medium-size businesspeople,
and some are wondering whether these customers are being affected
by the Chinese economy."
Change Of Luck
The two biggest casino operators --Las Vegas Sands (
) andWynn Resorts (
) -- have battled earnings declines in recent quarters after
years of steady and robust gains.
In the fourth quarter, Wynn Resorts reported a 25% drop in
earnings, worse than the 19% slip expected by analysts. Revenue
faltered 4%, while analysts had projected a 5% drop.
Still, Janney Montgomery Scott upgraded the stock to buy from
neutral Friday and lifted its price target 46%, to 175, based on
expectations for stronger growth in Macau.
Las Vegas Sands stormed ahead 7% Thursday, despite reporting a
wider-than-expected decline in Q4 earnings. But it reported
earnings up 52% and revenue up 48% for its majority-owned China
subsidiary operating four casinos in Macau.
Penn National Gaming (
) swung wildly, up and down, after its Q4 report Thursday. Shares
ended with a firm gain for the week, despite earnings that missed
analyst consensus by 60%.
MGM Resorts International (
) andCaesars Entertainment (
) keep losing money amid heavy exposure to still-sluggish U.S.
markets. MGM plans to release earnings on Feb. 20.
Despite the difficult end to 2012, all are expected to report
improved bottom-line numbers in 2013. And all have seen their
share prices rise in recent weeks.
That's mainly because there's a lot more good news than bad
news for casino operators right now.
"These are global companies, and when you still see growth in
Macau in the mid-teens, that creates optimism," said Amitabh
Kapoor, an analyst at Gabelli & Co. "There is also a certain
amount of comfort that the U.S. economy not going off the
IBD's gambling group includes a wide variety of casino stocks,
from large international companies like Las Vegas Sands and Wynn
to smaller outfits likePinnacle Entertainment (PNK) andIsle of
Capri (ISLE), which operate casinos in mostly Midwestern and
Southeastern U.S. markets.
The casinos themselves also run the gamut. Some are sparkling
behemoths with thousands of hotel rooms and a seemingly endless
parade of shops, restaurants and entertainment spaces. Others are
modest enterprises with a few dozen slot machines, a snack bar
and free parking.
Gambling Meccas like Macau and the Vegas Strip tend to the
glitzy side. To compete, smaller markets in the U.S. have to
serve up a healthy portion of glitz as well.
"When a new state considers gaming, it wants establishments
that not only have casinos but also restaurants, shopping and
entertainment. These are typically multibillion-dollar facilities
with a wide variety of entertainment options," said Holly Wetzel,
vice president of communications at the American Gaming
Association, an industry trade group.
Meanwhile, Wall Street has been betting pretty heavily on
casino stocks. IBD's Leisure-Gaming/Equipment group, which also
includes manufacturers of gear used in casinos, climbed to a No.
13 ranking on Friday among 197 industries tracked by IBD. The
group started December ranked No. 125.
The advance began Nov. 16, a day after Hong Kong's Hang Seng
index began climbing out of a brief pullback. The Hang Seng has
since gained 12%, the Shanghai Composite is up 23% from a Dec. 3
low and attitudes toward spending in China appear to be
The casinos group received an added boost Thursday, when
lottery ticketing and systems makerScientific Games (SGMS)
announced it would buyWMS Industries (WMS) for around $1.5
billion. WMS (formerly Williams Manufacturing) is the leading
maker of slot machines and other gaming equipment for the casino
industry. The combination gives the company enough depth and
breadth to form a solid platform for pursuing global gaming
(Williams is familiar to anyone old enough to have grown up
playing arcade pinball machines.)
WMS spiked 51% on the news.
Optimism over the gaming market as a whole has helped push
stocks higher, experts say. So has the fact that some casino
operators have worked hard to strengthen their balance sheets
after years of piling up debt.
"If you ask me why a stock is up, it's because the
fundamentals are strong, it has cleaned up its balance sheet, and
it benefits from global growth," analyst Kapoor said.
Macau is the undisputed heavyweight champ of the global casino
industry with about $38 billion in gross gambling revenue last
year, according to January data from the Macau government.
By comparison, Las Vegas is about a $6 billion market, which
puts it in a tight race with Singapore for the world's No. 2
"Macau is where Las Vegas Sands, Wynn and, to some extent, MGM
are focusing their growth," Kapoor said.
Some 70% of Sands' revenue during the 2012 fourth quarter came
from its Macau operations. Wynn got about 70% of its Q3 revenue
from Macau, while MGM's Macau unit accounted for nearly 30% of
Although growth is slowing in Macau among VIP customers,
China's vast number of middle-class gamblers has helped pick up
The mass market is appealing to casino operators because they
don't have to pay VIP junket operators to lure middle-class
customers. Junket operators act as middlemen for the casinos,
luring high rollers with promises of free rooms, travel and other
"The mass market is a more manageable business as far as the
casinos are concerned," Bartlett said. "And there's a lot of
potential for growth. Only 1% of the Chinese population has been
to Macau, and a lot of people would like to go there."
In the U.S., the casino industry continues to bounce back
slowly from the slump that began in 2008.
Preliminary data from the American Gaming Association show
that gross gaming revenue for commercial U.S. casinos grew 5.5%
to $32.3 billion during the first nine months of 2012. That
compares to 3% growth during all of 2011. Full-year 2012 data
were not available at press time.
"A lot of the growth is due to expansion in markets like
Maryland and Pennsylvania," the AGA's Wetzel said. "More states
want the revenue and the jobs available through the casino
In November, Maryland voters approved a measure that would
allow casinos in the state to offer table games such as blackjack
and roulette, and also allow a casino to be built in Prince
George's County -- a cab ride from the nation's capital.
Massachusetts is in the process of deciding which casino
companies get gaming licenses. Wetzel says it will likely be 2014
before the licenses are issued. MGM, Caesars and Penn are among
the companies bidding.
Much will depend on how the economies shake out in China,
Singapore and the U.S. Although China's economic growth is
slowing, it's still pretty solid at around 7% to 8% in 2012,
according to most estimates.
Singapore's growth also has slowed. The U.S. economy continues
to crawl ahead at a sluggish pace, though there have been some
positive signs of late.
"The American economy appears to be doing better," Bartlett
said. "The latest job numbers were encouraging, and the housing
market is picking up. These should help the prospects for
Macau should benefit from a fast-rail network being developed
in China as well as a bridge that will connect Macau to Hong
Kong, he says. Both projects will make it easier for customers to
reach Macau's casinos.
Another potential growth driver is that other Asia/Pacific
countries are eyeing the resort casino market.
"There's a willingness to consider gambling in other countries
where there wasn't before," he said. "We expect South Korea, the
Philippines and Japan to follow the lead of Macau and Singapore
in building super resort casinos."