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December 19, 2014

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Casino stocks plunge to new lows

Major casino stocks hit new all-time lows today, their shares pulverized by panicking investors on a day when global markets plunged.

Except for MGM Mirage, whose shares are up less than half a point. The company has one of the lighter debt loads in the industry, relative to earnings, in spite of its massive CityCenter joint venture. It also has the assistance of a very wealthy man, majority shareholder Kirk Kerkorian, who has indicated that he won't be bailing out of the company and might actually put more of his resources there.

Investors will find out more when the company reports earnings next Wednesday.

Wynn Resorts fell more than 13 percent to $36.59, Las Vegas Sands fell 23 percent to $6.32 and Boyd fell more than four percent to $4.01. At these prices, you'd think earnings at these companies had been cut in half, if not by two thirds instead of the 20 to 30 percent range.

Then again, this is more of a loan crisis than an earnings crisis.

Gaming companies are restructuring their bank loans because they are falling short of bank requirements that they generate enough cash relative to their outstanding loan debt. The major companies are still able to make interest payments on the debt.

The stock with the biggest debt to earnings ratio of the major casino companies is Las Vegas Sands, which is one reason why the company – after receiving a cash infusion of $475 million from CEO Sheldon Adelson – today announced a plan to raise additional capital from an unnamed investment bank.

Though it seems unlikely that banks will force Las Vegas Sands or any of the other major companies into Chapter 11 bankruptcy, investors aren't waiting around to find out. They are ditching the gaming industry because it depends on major loans from banks to survive and thrive. Others are forced sales by hedge funds that have dissolved in the market meltdown.

In the words of a Deutsche Bank report coauthored by the firm's Chief U.S. Economist Joseph LaVorgna and issued today, "There is little precedent in the modern era for the type of seizing up in financial markets which has occurred over the past month."

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