Report: Downturn to continue in '08

Apr 22, 2008 7:01 PM

By David Stratton | First quarter results for U.S. gaming operators slipped about 2%, solidifying concerns that the gaming industry has been affected by the slowing economy, according to a report released by Goldman Sachs last week.

"We recently lowered our 2008-2009 gaming estimates and are now 5% below consensus for 1Q2008 and 5% below for full year 2008," said Goldman Sachs analyst Steven Kent, who authored the report. "We expect 1Q2008 results to come in closer to our estimates and miss consensus as operators face a slowing U.S. and the equipment companies are likely negatively impacted by lower participation revenues and a slow replacement cycle."

Kent added that he expected 2008 and 2009 full-year forecasts to come down, and for gaming stocks to trade flat-to-down during the reporting period.

With revenues across the U.S. casino industry down about 2% in the first quarter, casino operators are expected to respond with cost-cutting measures, Kent said.

There will also be an impact on existing and future projects, such as delay, postponement or outright abandonment, which will be the focus of an upcoming Goldman Sachs report.

The slowdown of casino gaming has had a trickle-down effect on equipment manufacturers.

"We think the March quarter expectations for the equipment companies have been ratcheted down and the focus will be on the June and September quarters, which still show an acceleration in profits," Kent said. "Slowing participation revenues and replacement sales could tone those quarters down."

Participation revenues, in which manufacturers receive a percentage of a slot machine’s intake, comprise about 53% of IGT’s total revenues; it accounts for 26% of Bally’s and 35% of WMS’s total revenues.

Kent predicted the downtown could continue well into 2009, but that the expected roll-out of server-based gaming next year should provide a boost for manufacturers.

Here is a closer look at estimates for key casino operators:

Las Vegas Sands

Because of a slowing travel market in Las Vegas, Goldman Sachs estimates that the company’s new Palazzo will generate $33 million in EBITDA income for the quarter. The Venetian, with room revenues down 1.5%, has a projected EBITDA of $88 million, down from $110 million a year ago.

The company’s two Macau properties, Sands and Venetian, are expected to produce a combined EBITDA of $222 million.

"A more competitive VIP environment may have impacted the company’s business at both the Venetian and Sands Macau," Kent said.

MGM Mirage

Goldman Sachs estimates that MGM Mirage will report a 3% quarterly drop in average revenues at its Las Vegas Strip resorts.

Future earnings could be "at risk" as MGM Mirage has shown a "mix-shift" to more retail customers versus gaming customers in recent years.

"We expect these non-gaming revenues (hotel, food and beverage, retail, entertainment, etc.) to be more discretionary and more at risk in the current economic environment," Kent said.

Wynn Resorts

Even though Goldman Sachs estimates declines in first quarter gaming revenues and EBITDA, Wynn is one of the "strongest" operators in a "weak sector."

"While we are increasingly nervous about non-gaming revenues in Las Vegas, we think Wynn could be less susceptible given their higher end customers and lower exposure to conference/convention," Kent said.

Wynn’s Macau resort posted significant increases in revenue in the first quarter versus 2007’s fourth quarter, and year-over-year from 2007’s first quarter.

The company is developing another Macau property, a $5 billion mega resort on 52 acres on the island’s Cotai Strip.

Details on the Cotai project aren’t expected to be revealed until after the company opens its new Encore resort at the end of the year.