This 'Recession-Proof' Industry Just Fell 43%
By Ian Davis
June 9, 2008
To some degree, the myth makes sense...
When money gets tight, consumers stop buying luxury goods and redirect what spending money they have to affordable entertainments... like going to the movies.
According to the president of the National Association of Theatre Owners, box office ticket sales climbed strongly during five of the past seven recessions.
Casino operators thought they were in the same boat as Hollywood... "In the down business cycle, the casinos don't really take a hit," said a spokesperson for Columbia Sussex after its purchase of Tropicana two years ago.
Here's the rationale... Gambling is a habitual activity for many people. They are not going to kick their habit just because they're making less money. In fact, a recession may even encourage more people to chase the dream. After all, more people are desperate for windfall profits when times are tough.
That logic worked out well for casino operators during the last recession... Between 2000 and 2003, the Datastream Gambling index fell only 4.1% while the S&P 500 fell 40.1% and the Nasdaq fell 67.2%.
So going into this economic downturn, casino operators thought they were safe, and they bet big...
The management of Station Casinos took over the company in November through an $8.5 billion buyout. And private-equity firm Apollo Management purchased Harrah's in January in a $27 billion leveraged buyout.
Michael Paladino, a Fitch Ratings analyst, told Bloomberg the gaming industry is probably the most leveraged it's ever been... "There's going to be an increase in defaults," he said.
The defaults are already beginning. Tropicana went bankrupt in May, and Herbst Gaming is probably following close behind.
Take a look at this chart...
As you can see, gambling stocks are getting crushed. They have fallen 43% in just the last seven months.
You'd think, after such a severe selloff, gambling stocks would be cheap... but that's not the case:
Datastream Gambling Index |
|
Current |
Median |
Premium |
| Price to Earnings |
29.7 |
21.5 |
38.1% |
| Price to Book |
5.2 |
2.7 |
90.1% |
| Dividend Yield |
0.28% |
0% |
|
|
As you can see, the gambling index is currently selling for 30 times earnings, a 38% premium to its normal P/E of 21.5. And the industry's current price to book is 90.1% higher than its average.
Despite this index's bleak future and astronomical valuations, I wouldn't short it just yet. After falling 43% in the last seven months, I believe a relief rally is probably overdue.
The best way to play the gambling sector is to wait until gambling stocks undergo a substantial rally and then short the most vulnerable.
Good investing,
Ian Davis
