Gaming Becomes a Bad Bet

Today's collapse of the huge $6.1 billion deal between Penn National and a handful of private equity firms is the latest in a round of bad news for gaming stocks. Fortress and Centerbridge Partners terminated the 13-month-old deal, likely finding their $67-a-share price a bit rich given Penn's current price near $30. (The shares did rise, though, on a $225 million break-up fee.)

After several flush years from Las Vegas to Macao, it seems the players just aren't flocking to the tables (and hotels, and shops) as they have in years past.

In Las Vegas, hotel room revenue is declining. Meanwhile, hopes that Macao's booming visitations by Asian gamblers would yield massive profits look a bit tarnished, as long-established middlemen and junket operators carve out a bigger piece of the profits that casinos and Wall Street hoped would flow to the operators themselves.

Analysts at BMO Capital Markets called the gaming market "bipolar." BMO also said its gaming stock universe fell a painful 29.4 percent in the second quarter as stocks suffered a "double whammy" of declining earnings expectations and contracting valuations.

BMO says earning expectations for leaders like Wynn Resorts, MGM Mirage, and Las Vegas Sands Corp. need to come down a bit, though as the sector approaches levels last seen the 2001-2002 downturn, a bottom could form.

That's not terribly encouraging, and as BMO puts it:

The down cycle has been painful these past eight months or so for most traditional investors and is currently unrelenting to the downside on an almost daily basis as investors repeatedly capitulate and the stocks continue their declines.