Published:
July 21, 2008
Sooner or later, every good winning
streak comes to an end -- but I wouldn't bet against the house
for long. It has been a challenging period for leisure stocks
over the past six months, but not too many have been hit quite
as hard as those in the gaming sector. But thanks to this
overdone sell-off, valuations for many former highfliers in this
group have fallen back to earth, casting Market Vectors
Gaming (AMEX: BJK,
$30.06) as a somewhat unlikely, but attractive, value
play.
During previous economic downturns, casinos have been relatively
immune to slowdowns in discretionary consumer spending. However,
soaring energy costs, plunging home values and other concerns
have made life tougher on resort operators this time around.
Furthermore, there has been an industry-wide shift to
counterbalance gaming revenues with those generated in the
hotels, restaurants and other places off the casino floor. This
has been a boon over the past few years, but has also left
destination resorts more susceptible to economic headwinds than
they were just a decade ago.
As a result, the gaming industry is finding this particular
slump to be more painful than others. So after a multi-year
rally, Wall Street has turned decidedly bearish and has been
cashing in its chips.
For example, MGM Mirage (NYSE: MGM), owner of high-end Las Vegas
Strip properties such as the Bellagio, MGM Grand and Mandalay
Bay, has tumbled from $100 per share to under $30. Meanwhile,
rivals like Boyd Gaming (NYSE: BYD) and Las Vegas Sands (NYSE:
LVS) have shed over three-fourths of their value since this
vicious downturn began. And it hasn't just been the resort
owners that have suffered; slot-machine giant International Game
Technology (NYSE: IGT) has also been in a freefall lately, as
have others.
As is often the case, the punishment simply hasn't met the crime
-- in recent months, visitation and gaming expenditures in most
markets have been weak, but destinations like Las Vegas are
hardly ghost towns.
According to the Las Vegas Convention and Visitors Authority,
nearly 13 million people have flooded into Las Vegas through
April of this year, almost unchanged from 2007. Furthermore,
those visitors have filled up 90% of the city's 136,000
available hotel rooms and spent $2.7 billion in its casinos.
Those two figures represent modest year-over-year declines, with
occupancy rates and gaming revenues down -1.7% and -3.3%,
respectively.
As might be expected during these tough times, some customers
have been scaling back their gaming budgets. And the latest
monthly figures from May do show further signs of deterioration.
However, while business is soft and earnings are down, this
slump reflects nothing more than temporary economic conditions
-- not a long-term systemic problem.
The global appeal of gaming has grown unchecked for the past
three decades, and major tourist destinations like Las Vegas,
Macau, Atlantic City and coastal Mississippi will soon be as
bustling as ever, churning out copious cash flows for property
owners. So for investors willing to look a few years down the
road, this relentless sell-off has provided a golden opportunity
-- and BJK is the ideal place to place your bets on an eventual
rebound.
The fund provides broad exposure to upscale casino owners like
MGM, as well as second-tier riverboat operators, slot makers,
equipment vendors, and online software developers. And less than
40% of the portfolio is tied up in the U.S. The rest is invested
in promising foreign companies like Melco PBL -- a pure-play on
the booming Macau market and a favorite with high-rollers. Last
quarter, the firm's Crown Macau casino reported VIP table chip
volume of $19.5 billion, more than double the $8.5 billion
handled the prior quarter.
Looking ahead, continued technological advancements, favorable
regulatory legislation in the U.K. and elsewhere, and rabid
demand from both mass-market and high-income consumers around
the world should all spell continued prosperity for the gaming
sector.
It may take a few quarters for business to return to normal. But
this sell-off has sweetened the odds considerably, and I don't
want to be standing around waiting when the deck finally takes a
turn for the better. Plus, May's dismal gaming figures will
likely have many analysts ratcheting down their earnings
estimates. So with the bar sharply lowered, it will only make it
that much easier for gaming companies to beat expectations once
things begin to improve, paving the way for a powerful rally.
Nathan Slaughter
Editor
The ETF Authority
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Several years ago Nathan switched gears and decided to devote
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Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
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