“For stock gains, try a cruise or maybe a business hotel”

For stock gains, try a cruise or maybe a business hotel

Posted: 10 Jul 2010 10:11 PM PDT

LAS VEGAS • Despite the country's lingering economic worries, the casino's blackjack tables were surrounded by rowdy players with drinks in hand who were shouting in celebration.

Stoic dealers accepted bets while rows of slot machines clanked loudly in the background. A line of arriving patrons wandered through the crowded casino toward hotel check-in, pulling wheeled suitcases behind them.

So the gambling industry is back and an investment opportunity, right? Not necessarily.

This summer, the cruise lines and business hotels, not the casinos, are the leisure industry's investment leaders.

"Just because you see a casino is packed doesn't mean it is making any money," cautioned Esther Kwon, equity analyst with Standard & Poor's Corp. "You don't know how many people are being given complementary rooms, meals, drinks or entertainment, which means potential investors must look at the financials and do their homework."

Gambling is less recession-resistant because it is no longer strictly a Las Vegas and Atlantic City business, but involves growing nationwide competitors, she said. Proliferation of commercial and Native American gambling venues throughout the U.S. is expanding the industry. For now, that primarily benefits the slot machine manufacturers.

Smooth sailing is ahead, however, for investors in stocks of cruise lines this summer because cruises fit so nicely with the current price-consciousness of American consumers. People want to take vacations but don't want the stress and guilt of overpaying.

"The cruise sector of the market has been very strong because lots of people are trading down to a cruise rather than taking a longer, more expensive land-based destination vacation," said Steve Wieczynski, leisure industry analyst with Stifel Nicolaus in Baltimore. "The stocks look good because of that value proposition."

In terms of cruise industry stocks, the primary operators to be considered by investors are Carnival Corp. (CCL), which owns 10 different brands, and Royal Caribbean Cruises Ltd. (RCL) which owns three different brands. Together they control about 75 percent of the cruise market.

"And they're not really competing against each other in price," added Wieczynski. "They're trying to grow the overall business and get more first-time cruisers on board."

The hotel portion of the leisure industry has been in recovery mode since fall, according to Patrick Scholes, senior lodging analyst with FBR Capital Markets Corp. in Arlington, Va. For about a year, business trips to see clients had been skipped altogether, he said, but it occurred to companies that they had better go now.

"We're seeing hotels push their hotel rates back up, especially for the weekday traveler," said Scholes. "We're still quite a bit off the higher levels of 2007-2008, but it is coming back."

The business-traveler hotel brands whose stocks are especially attractive include Marriott International Inc. (MAR), Hyatt Hotels Corp. (H), and Starwood Hotels & Resorts Worldwide (HOT), which owns Sheraton, said Scholes. Eventually "a rising tide will lift all boats," he expects; as those hotels grow more expensive, it will send business to less expensive chains.

An investor who bought hotel stocks last year received a great return on those stocks, Scholes pointed out, though subsequent investors haven't missed out altogether. But since the risk of the hotel companies is no longer as great as last year, they won't be as hot this year.

While industry consolidation is unlikely in cruise lines, it may occur in gambling, believes Wieczynski. Among the regional companies, Penn National Gaming Inc. (PENN) has a strong balance sheet and in a good position to acquire other gambling companies, he said.

Some strong players in gambling include Steve Wynn's company Wynn Resorts Limited (WYNN), MGM Resorts International (MGM) and Las Vegas Sands Corp. (LVS), which is primarily concentrated in Las Vegas, said Wieczynski.

A resurgence in corporate travel should benefit Wynn, MGM and Las Vegas Sands, said Kwon, since people booking corporate travel don't spend endless time looking for the best deals. Businesses have specific dates for conferences, they must get their people from Point A to Point B, and there are expense accounts, she noted.

The strong base in Macau, China, of giants such as Las Vegas Sands and Wynn is a major plus for them, she said.

Las Vegas Sands Chairman Sheldon Adelson recently said he expects Macau's casino revenue to increase more than 30 percent in the second half of the year. That will benefit all six casino operators in that international gambling hub.

Gambling equipment makers will do better this year thanks to regional gaming expansion. International Game Technology (IGT), WMS Industries Inc. (WMS) and Bally Technology Inc. (BYI) are firms that should benefit, she said. While it takes a little longer because of legislative events that must play out in each state, regional gambling is less dependent on the overall economy.

Adelson expects gross gambling revenue, after two unprecedented years of decline, to be flat to up slightly this year.

"We don't expect it to be a strong year, but rather a stable one and we'll likely be stuck in this position for another year or so," concluded Wieczynski. "For things to really get going, we would need to see the general markets, consumer confidence and consumer spending improve."

Until then, the leisure industry is being driven by bargain-hunters and business travelers, not gamblers.

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