Casino Stocks - Recession Proof No More?
Ahrens Advisors, L.P.
Gaming Commentary 3-6-08

First of all, I say "casino stocks" rather than "gaming stocks", because the stocks of manufacturers and the stocks of casino operators may act quite differently in this economy.

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The stock prices of large hotel & casino operators have dropped significantly. While gaming stocks have a significant past history of being somewhat "recession resistant", a history that I've quoted many times, casinos have behaved much differently in the past year. Although it's easy to see that short term casino stock prices are not recession-resistant, a question remains as to if gaming revenues are recession-resistant. The answer is "sort-of" or "maybe". It depends on your timeframe and where you look. We have seen decreases.

In the past, casino revenues were much more concentrated than they are now. Almost all revenue came from Las Vegas and to a lesser extent, Atlantic City. Regional casinos were minor. Most of a casino's revenues were from gaming operations - not hotel, restaurant & bar, retail, and other non-gaming functions. Today, an ever-increasing amount of casino revenue comes from non-gaming activates, and I compliment the casino operators for this additional revenue growth. Increasing room rates, expensive restaurants and nightclubs, and high-end retail have added to bottom lines. All these things have also helped to transform casinos into luxury escapist vacation destinations in many cases. On the other hand, all this non-gaming revenue has caused casino stocks to act much more like other consumer discretionary stocks. They're susceptible to an economic downturn.

The constant growth of regional casino operations has also changed the gaming landscape. Once again, state by state growth has generally been good for everyone's bottom line. Casino operators and manufacturers have both benefitted. Las Vegas certainly hasn't suffered because of regional competition. But, these regional operations have been hit the hardest by economic slowdown and the fears surrounding it. Many middleclass, middle-America gamblers are tightening their belts and gaming revenues really have dropped. In contrast, the revenues at high-end casinos, Las Vegas operators, and those doing business overseas may be at least a little more insulated as I'll discuss below. Their stock prices have been hit nonetheless.

I think some, but not all, of the companies on the list above may turn out to represent tremendous long-term values at their now reduced prices. (Funds that I manage own some, but definitely not all of these companies).

Gaming revenues have dropped, but in my opinion they haven't dropped enough to warrant the stock price declines listed above. But more importantly, revenue expectations have been reduced. Corporate earnings guidance and analyst estimates have all turned conservative. Now that gaming revenues have dropped; I believe there may be good base, steady gaming revenue. Serious gamblers will continue to gamble. Foreign tourists will continue to gamble. VIP gamblers will continue to gamble. Convention business will continue to bring in new customers. Some areas are doing quite well. Mid and small market casinos may continue to suffer the most. Higher-end casinos, new casinos in new markets, and those with competitive advantages will remain at least healthier.

The gaming revenue breakdown in Atlantic City serves as a good example. While overall revenues were down in the 4th quarter of 2007 as Atlantic City dealt with a slowing overall economy and competition from neighboring markets, one property held up much better than the others. The Borgata (MGM and Boyd joint venture) is widely regarded as the highest quality property in Atlantic City. Its revenue growth was close to flat (rather than down) during the most difficult periods and but it grabbed market share from weaker competitors that dropped.

Top properties, especially those on the Las Vegas strip, will pull market share from weaker properties, will attract VIP gamblers, and will attract foreign gamblers. The weak U.S. dollar has caused much higher than usual visitation from foreign tourists. Spending money and gambling in the U.S. is very attractive at current exchange rates. There is certainly is no recession among foreign VIP gamblers. Although we will see various periods of ups and downs and a mixed-bag of U.S. gaming revenues, these top properties will fare much better than most regional operators during tough economic times. The U.S. operators doing business internationally will also continue to see that business segment grow. There's no recession in Macau, China. Over the next few years, I believe the operators of the best, market-dominant U.S. properties and those with significant international business such as MGM Mirage, Las Vegas Sands, and Wynn, will prove to be "recession-resistant" once again. They may perform quite well from today's reduced stock prices and moderated earnings expectations. There's no compelling reason to think that gaming revenues will continue to decline significantly from already reduced levels, although reduced earnings levels may take a quarter or two to "cycle through".

For the remainder of 2008, the best gaming investments may involve manufacturers, suppliers and other areas of gaming outside of the main casino / hotel operators. But, for long term investors, I'm confident that a few of the top casino operators will turn out to be tremendous buys at their March 2008 levels.

All information provided is believed to be from reliable sources and opinions expressed are subject to change without notice. This commentary has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell securities, mutual funds or to participate in any particular trading strategy.

Dan S. Ahrens is President and Treasurer of Ahrens Advisors, L.P., an SEC-registered Investment Advisor he founded in September of 2005. He is Portfolio Manager of the Ladenburg Thalmann Gaming and Casino Fund, opened on March 31, 2006. Prior to forming Ahrens Advisors, he was President of the MUTUALS.com Funds, and served as portfolio manager of the Generation Wave Growth Fund (GWGFX) and the Vice Fund (VICEX), which he stated in 2002. He was President of the Funds' Advisor, Mutuals Advisors, Inc.

Dan is the author of the book, "Investing in Vice, the Recession-Proof Portfolio of Booze, Bets, Bombs, and Butts", published in 2004 by St. Martin's Press. He has appeared on CNN, CNBC, ABC News, MSNBC, Bloomberg TV & Radio, PBS Wall Street Week, and the BBC. He has been featured along with funds under his management in TIME Magazine, The Economist, New York Times, The Wall Street Journal, Investor's Business Daily, Barron's, Financial Times, and many other publications.

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For more information contact:

Dan S. Ahrens
Ahrens Advisors, L.P.
4144 N. Central Expressway, Suite 600
Dallas, TX 75204

Ladenburg Thalmann Gaming and Casino Fund
www.gamingandcasinofund.com


Phone: 214-934-8160
Fax: 214-276-7372

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