A Stern Glance

Spending nosedive leads casino operators to cut jobs, halt projects in 2008

NEW YORK (AP) — Consumers cut back on discretionary spending in 2008, draining casino operators’ earnings and pushing the sector’s stocks down– in at least one case more than 90 percent– and resulting in job cuts and a pullback on development projects.
In previous economic downturns, casinos had been hailed as almost recession-proof. But the latest recession — which began in December 2007 — has a different look this time around and leaves little optimism for improvement in 2009.

Early in the year, casino operators knew they faced a tough road as Nevada, hobbled by the housing slowdown, began to buckle. In February, Wynn Resorts Ltd. Chief Executive Steve Wynn predicted “general weakness” for the Las Vegas market due to the softening economy. By the end of the year the state’s Gaming Control Board reported a 22.3 percent slide in winnings during October, the largest percentage decline since the board began producing monthly reports in the early 1980s.

“People just stopped spending where they didn’t need to,” Morningstar equity analyst Sumit Desai said in an interview.

As the year wore on and consumers gambled even less, the sector’s earnings began to suffer and financing became a bigger concern. Casino operators, such as Boyd Gaming Corp. and Las Vegas Sands Corp., began to scale back on development projects.

Reining in projects was part of a bigger move by many companies to improve their liquidity, as several struggled with their balance sheets. In November, Las Vegas Sands completed an offering of common stock, preferred stock and warrants that provided about $2.1 billion of additional capital. The company had financing concerns since at least September, when CEO and founder Sheldon Adelson and his wife, Miriam Adelson, invested $475 million to keep it in compliance with debt obligations.

Much of Las Vegas Sands’ value and business plan was based on building mega-casinos globally. Its stock price plunged once financing began to dry up and the projects were taken out of the stock’s value, Desai said.

Las Vegas Sands’ stock fell 94 percent in 2008.

Elsewhere, Trump Entertainment Resorts Inc., whose biggest shareholder and chairman is Donald Trump, said earlier this month that it would not make a scheduled loan payment while it tries to work out new terms with its lenders. Resorts Atlantic City, whose parent company is Colony RIH Holdings Inc., did the same last month.

With money not flowing as freely, casinos began to eliminate jobs. In mid-December, Las Vegas Sands said it would cut more than 200 workers from the Venetian and Palazzo in Las Vegas, while MGM Mirage said earlier in the year that it was laying off more than 440 management employees. Last month, the Borgata Hotel Casino and Spa, a joint venture between Boyd and MGM Mirage, laid off 400 workers. Shares of MGM Mirage slid 84 percent for the year.

Even Macau, the Chinese enclave once hailed as the next Las Vegas, showed signs of slowing under the weight of a global recession and tightened visa restrictions. Casino revenue, while well ahead of last year, slipped 10 percent in the third quarter from the previous three months, the second straight quarter-to-quarter decline. And the former Portuguese colony may see only one major opening in 2009, from Hong Kong-based Melco Crown Entertainment Ltd. This is in sharp contrast to years past, when an average of five casinos opened annually between 2004 and this year. Melco’s stock has suffered, dropping 73 percent in 2008.

The only companies in the sector that seemed to keep their heads above the fray were casino equipment suppliers, thanks to solid balance sheets and stable product demand. In mid-December, Goldman Sachs analyst Steven Kent encouraged investors to buy gambling technology stocks, which include Bally Technologies Inc. and WMS Industries Inc., saying the companies allow investors to tap the consumer discretionary market without taking too much risk.

The gambling equipment suppliers are still pulling in business due to ongoing equipment needs and may benefit from cash-strapped states that are looking at slots as a way to boost their tax receipts, Kent said.

While 2009 has yet to start, experts are already looking past the new year. Ratings agency Fitch Ratings doesn’t foresee a sector turnaround until 2010, particularly if capital markets remain soft and unemployment continues to climb next year.

“2009 has some potential to be a decent year, but it’s hard to see any catalyst that would drive things getting better necessarily,” Morningstar’s Desai said, also predicting a recovery is likely to be closer to 2010.