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Odds Are Against Casino Shares Paying Off Now

Monday, 07 Jun 2010 09:35 AM

There are a couple of reasons that I can't help but believe that the casino sector has the opportunity to generate boatloads of income down the road.

The first reason, as many of us have learned firsthand, is that the odds on the games that casinos offer generally fall in the casinos’ favor.

Secondly, Americans seem to genuinely love to wager on cards, slots, and sporting events as evidenced by massive development of pricey casinos in Nevada, the Gulf Coast and Atlantic City, N.J.

However, my belief in the long term opportunity of this industry does not mean I am presently head over heels on the sector from an investment perspective.

In fact, it seems that there could be sizable risk in the near future.

There are several things that have me concerned.

From an aerial view, the average family appears to be still struggling in many cases to keep their heads above water and to pay basic bills, buy birthday and holiday gifts, etc.

From my observations, I would say that there seems to be minimal appetite for dropping money on a horse race or high-end Pai Gow poker game.

Secondly, because many states and Uncle Sam are in a rather large financial sinkholes, it is distinctly possible that those governments may seek to fill gaps by raising taxes (income or real estate, for example) or fees, which in turn would place an additional burden on gamblers and effectively make them less likely to travel to major gaming destinations around the nation.

And finally, I believe that interest rates, which have obviously been very low, are likely to rise during the next year to three years, which if I am correct, could dampen the want for gambling in casinos.

Digging even deeper, I am concerned about how the investment community is currently valuing some of the popular traded gaming stocks.

Specifically, I look at companies like MGM Mirage (MGM), which currently trades for more than $12, yet it is expected to lose 90 cents a share this year.

Meanwhile Wynn (WYNN), headed by casino-resort and real-estate developer Steve Wynn, is expected to earn $1.11 a share this year, and yet it trades for more than $79 a share. Las Vegas Sands (LVS), another big and clearly popular name in the gaming space, is expected by analysts to earn 35 cents per share this year and trades at more than $24 per share.

In short, based on expected earnings, I believe these companies I mentioned already seem overvalued.

Gaming is an industry that can really flourish once our economy shifts back into a much higher gear.

But in the nearer term, it appears to be loaded with possible risk and from an investment angle does not, in this writer's honest opinion, look very attractive.

About the Author: Glenn Curtis
In the mid-1990s, Glenn Curtis worked as an equity analyst for a regional broker in New Jersey. From there he worked for several high-profile print and Web publications, primarily as a financial writer providing both stock market commentary and educational content. He has previously held his series 6,7,24 and 63 licenses. Click Here to read more of his articles.

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There are a couple of reasons that I can't help but believe that the casino sector has the opportunity to generate boatloads of income down the road. The first reason, as many of us have learned firsthand, is that the odds on the games that casinos offer generally fall in...
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2010-35-07
 

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