Will the Las Vegas Comeback Continue?
May 29th, 2009 | By Greg Gunner Guenthner | Category: Stock Market InvestingSince the markets found a short-term bottom in March, we’ve witness the meteoric rise of many beaten-down small-caps. And of all the names and sectors that rebounded this spring, none was more impressive than the resort and casino stocks.
Las Vegas Sands (NYSE: LVS) and MGM Mirage (NYSE: MGM) rocketed to triple-digit gains in just a few short weeks.
Las Vegas Sands, the owner of the popular Venetian Hotel in Las Vegas, found its stock absolutely gutted in 2008, dropping from well above $100 per share down to single-digits. Investors fretted over the company’s massive debt, and concerns regarding Las Vegas’ “recession proof” economy hitting the skids. But shortly after LVS shares fell to $1.38, a comeback was in the works…
As you can see from the chart above, the gaming industry’s 2009 rebound has been as intense as its fall. Since its lows in March, shares of Las Vegas Sands have rocketed more than 400%!
LVS let its share price out of the basement by restructuring portions of its debt. In April, the company released news of a $5 billion credit pact amendment that would allow the company to repurchase up to $800 million of its outstanding loans.
But can these amazing casino comeback stories continue? Or should investors take their money off the table?
Why It’s Time to Book Your Gambling Profits…
While LVS stock may have turned a corner, the company itself continues to have issues it needs to work out…
First, its international business segment could be in for a rough ride. LVS already is exploring deals where it would sell its Macau casino for $1.3 billion — then lease back the lavish building from the new owner, opting for a performance-based rate.
This could be a crucial deal for LVS, considering how bad things are getting in the Far East’s gaming capital. Travel to Macau was down nearly 10% during the first quarter compared to Q1 2008 numbers. That’s a fairly significant drop off.
Then there’s the company’s debt situation. For highly leveraged companies– such as those in the gaming industry — a deep recession could bring a firm to the brink of bankruptcy. It remains unclear whether LVS and other prominent casino companies will be able to stay on top of debt obligations. Simply put, one bad quarter could spell disaster for LVS—and its shareholders.
MGM Mirage is another gaming stock struggling with immense debt. Earlier this month, MGM completed a $1 billion stock offering in an attempt to relieve some of the pressure caused by the $14 billion in debt riding on its balance sheet.
As far as we’re concerned, both of these stocks pose significant risks to investors right now. The success of the gaming industry is too closely connected to business travel and tourism. Both are suffering and at the mercy of the recession. If a quick recovery is not in the cards, there could be plenty of pain left for LVS and MGM.
If you bought either of these names recently, you’re probably up big. Don’t get greedy — now’s the time to cash out. If the Las Vegas convention and gambling industries continue to suffer, the worst may be ahead of LVS and MGM…
Best,
Greg Guenthner
Source: Will the Las Vegas Comeback Continue?
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Mr Guenthner’s comment “LVS is already exploring deals where it would sell it’s Macau Casino” exposes a very limited knowledge of all that goes on in Macau with LVS. Questions he might consider from those who understand it all much better:
> Which casino: Sands, Venetian, 4 seasons, Cotai sites 5 and 6, the malls??? The leaseback idea on
Sands Macau is an older, refuted speculation.
> Does LVS’s focus on the Mass market and it’s advantages (eg: Venetian’s relatively good Q1) have any
weight in this opinion?
> Cost cutting relative to debt covenants and the war chest for buying back debt as needed… how about the
huge surge in junk bond yields that have enabled MGM to float an issue?
> Intense interest on a joint venture on sites 5 and 6 that would complete the project, inject liquidity and
launch revenues from the site.
> Cotai-Jet’s 30%+ ferry market share and how that, and visitorship to Cotai, will be impacted by CIty of
Dreams… think critical mass of mass market.
> Mr Guenthner, do you even understand the typical difference in table hold between VIP and Mass market?
This doesn’t sound very contrarian to me. It sounds just like what every one else has said. Nothing insightful.
These stocks are still down over 90% and they have skillfully avoided the worst case scenarios. It will be a few quarters before they become profitable but by then the stock prices will be much higher than now. This is what investors always hope for, stocks that are going to double triple and more but when the opportunity comes they are too fearful to take it but then groan about it later.