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Tickers in this Article: BYD, WYNN, MGM, PENN, LVS
"Sin Stocks", as measured by the ISE Sindex are extremely volatile, appreciating by nearly 338% in the past ten years, but showing immense fluctuation in between. The index, which measures the performance of beer and liquor producers, cigarette companies and casinos, reached an-all time high of 137.5 in October, 2007 before dipping into the 50s range in December, 2008. Currently, the index has temporarily reached a plateau at approximately 110.

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Potential in Casino Stocks?
In late June, the sector gained some upward momentum as John Paulson purchased large positions in MGM Resorts (NYSE:MGM) and Boyd Gaming (NYSE:BYD). But is the casino industry generating enough revenue growth to justify an uptrend in share value? Earnings announcements like those from Wynn Resorts (NYSE:WYNN) reporting earnings of $52.4 million, nearly a 100% on a year-over-year basis, may suggest so.

Through the increased use of promotions, Wynn had an increase of revenue from $732 million to $1.032 billion, which was mainly driven by a 55% increase in casino gaming revenue, while revenues from rooms remained fairly flat, increasing by only $5 million from the comparable 2009 quarter. Based on the performance of the first half of the year, cash flows from operating activities increased to $147 million from a $8 million loss in 2009.

Not so Fast
Despite that these figures are initially impressive, there is one major area of concern: the primary driver of earnings growth has been operations in Macau, rather than Las Vegas. Adjusted earnings before interest tax and depreciations (EBITDA) for the quarter from Las Vegas operations decreased by 13.7% while Macau-driven EBITDA increased by 84.5%. Furthermore, the net revenues generated in Macau were over two-times greater in Vegas facilities. Given that the Vegas' consolidated asset base is valued at $4.14 billion, and Wynn Resorts only has $1.9 billion of Macau assets, the American casino and gaming industry has stifled.

A similar pattern of activity is found when analyzing the financial statements of Las Vegas Sands (NYSE:LVS), the largest player in the resorts and casinos industry. On a year-over-year basis, net revenues have increased by nearly $600 million; however, growth was almost exclusively fueled by continuous Macau operations and a new Singapore facility, which generated $216.4 million revenue in only 65 days. Similar to those of Wynn, Las Vegas assets are performing poorly. The return on Macau assets is 14.4% while the return on assets for Vegas operations is only 4.8%.

The Bottom Line
Much of the growth within the casino industry must be attributed to the world's new second-largest economy, rather than the largest. Due to the discrepancy between domestic and international assets, the industry has not been able to fully capitalize on growth opportunities. MGM Resorts, for example, is down 25% in the last three months, while Penn National Gaming (Nasdaq:PENN) has depreciated by 10% within the past year.

Once U.S. employment figures show improvement, so should American casino operations. In the mean time, expect volatility. (Can your principles make you richer or poorer? Find out if it pays pick your portfolio based on ethics. To learn more, see Socially Responsible Investing Vs. Sin Stocks.)

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