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Tickers in this Article: IGT, MGM, BYD, WYNN, LVS, BYI, WMS
Once thought to be recession-proof, many companies operating in the gambling industry are struggling royally from an expansion binge that was predicated on a steady supply of gamers in any economic cycle.

High on that list is Harrah's, one of the largest owners of Las Vegas casinos that was public until purchased by two prominent private-equity shops last year when credit was cheap and easy to come by. But these days casino bonds are performing poorly, with those from Harrah's priced to yield almost 15%, indicating the default risk has become quite high.

Going Broke In Vegas

A couple of other private firms are already crapping out as Tropicana Entertainment filed for bankruptcy and Herbst Gaming – an operator of casinos and gas stations throughout Nevada – has been unable to pay interest on its debt. Even Station Casinos, a former high-flying stock known for catering to the local Las Vegas market that was also taken private during the private-equity boom, is said to be at risk of defaulting on its hefty debt load. (For related reading, see An Overview Of Corporate Bankruptcy.)

It's little surprise the Las Vegas and domestic markets are struggling given the state of the domestic economy, which could end up hurting the largest players such as Harrah's, MGM Mirage (NYSE:MGM) and Boyd Gaming (NYSE:BYD), which continue to develop some of the largest properties on the strip and outlying areas. Even Macau in the Republic of China, which now bests Las Vegas as the largest gambling locale in the world by gambling revenue, is at risk of slowing and crimping the prospects of Las Vegas Sands (NYSE:LVS) and Wynn Resorts (Nasdaq:WYNN), which are both big players in Vegas but also set their sights on rapid international expansion.

Sitting On The Sidelines

I recently checked out the investment merits of many of the above casino developers and have decided to sit comfortably on the sidelines, even though many are trading toward their 52-week lows and at what appear to be reasonable valuation multiples. It's just too challenging right now to depend on firms that will need to tap the capital markets to replace debt coming due and finance large-scale projects still in the works, such as MGM's gigantic $9.1 billion CityCenter development in Vegas. Sure, the upside is substantial when the economy recovers and travelers start flocking back to gambling meccas, but so is the downside as long as the credit markets remain in fragile states.

I've tended to gravitate toward the slot machine and computerized game developers and find these firms represent safer bets these days. Top on that list is International Game Technology (NYSE:IGT), which is still hurting from the industry slowdown but remains impressively profitable and is trading at a very low multiple of earnings and cash flow. Its main competitors include Bally Technologies (NYSE:BYI) and WMS Industries (NYSE:WMS), which have done nice jobs of edging into IGT's industry-leading position as it focuses on developing server-based slots that are easier for casino companies to update and track gambling activity.

Add It All Up

I am finding the vast majority of gambling-related stocks too much of a gamble at current levels. And I'm not sure I would be much of a fan in a more stable economic environment given the capital intensity and lead times that come with developing and building large-scale casino and entertainment complexes. I'd rather stick with suppliers to the industry, such as IGT, as it can sell to a broad array of casino customers throughout the world that will keep coming back for the latest technology to swindle mathematically challenged gamblers who plan on luck to offset the fact that casinos win big on their gambling floors over the long haul.

For an interesting view on investing in casinos, check out A Prelude to Sinful Investing.

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