Analysts: Weakness in gaming industry continues

By Steve Green

Wednesday, July 28, 2010 | 5 p.m.

U.S. consumer confidence remains weak. More layoffs may be coming around the country, leaving people with even less money to spend. And while travel to Las Vegas is picking up, visitors are spending less for hotel rooms.

These factors show the Las Vegas gaming industry and the industry nationwide are likely to endure continued weakness at least through the end of the year.

That was confirmed Wednesday when Moody's Investors Service issued a report titled "U.S. Gaming: Proceed With Caution.''

Moody's made headlines June 22 when it upgraded the industry from negative to stable -- an indication the two and one half-year slide in gaming revenue and profitability may have bottomed out.

Moody's analysts led by Keith Foley on Wednesday presented an updated scenario with both some uncertainties and good news:

The uncertainties: "While sharp declines in U.S. monthly casino revenue have started to subside, there is a high degree of uncertainty over when gaming trends will improve from current levels, and if they do, how sustainable those improvements will be.''

Also, some state governments may expand gaming or increase gaming taxes, hurting existing operators; while lower spending by gaming companies on new must-see attractions and maintenance of existing properties will likely affect revenue down the road.

The good news: "Despite these headwinds, our outlook for the U.S. gaming sector remains stable because we believe severe year-over-year declines in monthly U.S. gaming revenue are nearing an end. As revenue bottoms out, we expect gaming company operating profits will stabilize by the end of 2010.''

Another bit of good news: "Although faced with challenges at their Las Vegas casinos, Las Vegas Sands and Wynn Resorts have been less affected because of their foray into Macau, an Asian market that is experiencing strong and growing visitation and consumer demand trends.''

In Wednesday's report, Moody's reiterated longstanding concerns that companies like industry giants Harrah's Entertainment Inc. and MGM Resorts International remain too leveraged -- meaning they are carrying too much debt in relation to cash flow generated by their casino resorts.

Harrah's, MGM Resorts and fellow Las Vegas companies Boyd Gaming Corp. and Pinnacle Entertainment Inc. are among the companies that need "overall business conditions to improve – not just stabilize'' in order to refinance debt coming due at ``less-than-onerous terms,'' Moody's said.

The backdrop of Moody's latest report on the gaming industry includes these four developments:

--Las Vegas Sands Corp., in announcing second quarter results Wednesday, noted occupancy and revenue per available room improved at the Venetian and the Palazzo on the Las Vegas Strip. But the average daily room rate at the Venetian of $184 was down from $186 in 2009's second quarter. At the Palazzo, the rate of $202 was down from $207 a year earlier.

--Wynn Resorts Ltd. last week said Wynn Las Vegas and Encore at Wynn Las Vegas posted an operating loss of $17.2 million in the second quarter vs. an operating loss of $8.3 million in the year-ago quarter. The properties posted an average daily hotel rate of $197 for the quarter ended June 30, down from $218 in the second quarter of 2009.

--Consumer confidence in the United States, a key factor in forecasting travel to Las Vegas and spending in the U.S. gaming capital, fell to a five-month low this month as Americans worried about continued job losses. The Conference Board, a private research group in New York, on Tuesday said its sentiment index fell to 50.4, below the median forecast of economists surveyed by Bloomberg News.

--Economists and analysts have been warning for weeks that even as private-sector job growth picks up, state and local governments are expected to lay off tens of thousands or even hundreds of thousands more workers. The states alone face a combined budget shortfall estimated by the Center on Budget and Policy Priorities to total $140 billion this fiscal year. The number of people employed by state and local governments has already declined by 212,000 since August 2008, the center says. As these workers are laid off, they'll be spending less on discretionary entertainment like gaming. The bottom line with unemployment around the nation is that it's projected to hover around the current 9.5 percent for some time.

"After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009,'' Federal Reserve Board Chairman Ben Bernanke told Congress July 21.