Almost all gaming stocks are negative year to date. The stock prices of many top quality U.S. hotel and casino operators are down significantly. Gaming revenues are down, visitation is down, room rates are down, food and beverage is down. Gas prices and jet fuel prices are up — way up.

These are things we all know. It’s all over the news.

Now negative news is once again coming out of Macau that gaming revenues aren’t growing “fast enough” and margins on VIP business are getting squeezed. Plus, fears around visa restrictions in China are coming up again.

I don’t expect things to improve worldwide in any meaningful way anytime soon. It’s ugly out there.

On the other hand, a great buying opportunity may be presenting itself in gaming stocks — for long-term investors at least. Again, I don’t expect any great improvements in gaming revenue or the overall economy any time soon. But we don’t need great improvements for gaming stock prices to hit bottom and start to recover. For value-oriented investors, stock prices don’t work that way. To be overly simplistic, we just need things to stop getting worse. We need all the bad news to be priced into the stocks. And the news has certainly been bad. Most people expect the second quarter to look a lot like the first — but not worse.

A small positive to consider — government rebate checks. Stimulus checks will total about $100 billion. On a wide national average, U.S. consumers gamble with about three-quarters of 1 percent of their money. That’s potentially $750 million of additional dollars spent on gaming. We certainly don’t know how much of this money will really boost the casinos — but it can’t hurt.

Now back to Macau. Gaming revenues in Macau increased 31 percent in May 2008 compared with May 2007, the smallest increase so far in 2008. This compares to a 44 percent increase in April and a high of 67 percent in January 2008. First, I hate discussions of “slower growth” when year-over year growth is 31 percent. Thirty-one percent growth is terrific. Many new properties are still scheduled to open and a great deal of infrastructure improvements are on the way. The Chinese government has approved a new bridge connecting the Chinese mainland, Macau and Hong Kong. That’s a huge commitment. Macau is still in a relatively early stage and growing at breakneck speeds. There’s no way revenues could continue to grow at the 67 percent we saw in January. This discussion also emphasizes the point that investors look at year-over-year numbers with blinders on. Far too often, they don’t care how numbers were derived. In Macau you need to look at properties open in January 2007 versus January 2008 to understand the 67 percent growth.

With various worries swirling around Macau’s growth and actual decreases in U.S. gaming revenues, stock prices have been absolutely hammered. Through regular ups and downs the gaming industry had a great history of acting rather recession-resistant. Gaming stocks have obviously acted quite differently in the past year. In hindsight, we can understand some of the reasons for this year’s decline.

First, in past years casino revenues were much more concentrated than they are now. Most of a casino operator’s revenue came from gaming operations — not hotel, food and beverage, retail and other non-gaming functions. Today, an ever-increasing amount of revenue comes from non-gaming activities. All this non-gaming revenue has caused casino stocks to act much more like other consumer discretionary stocks. They are more susceptible to economic downturns as room rates have fallen and other non-gaming revenues have suffered.

Second, the constant growth of regional casino operations has also changed the gaming landscape. In years past almost all revenue came from Las Vegas and to a lesser extent Atlantic City. Regional casinos were minor. Regional growth has been good for the industry. Las Vegas certainly hasn’t suffered from regional competition. But these regional operations have been hit the hardest by the economy. In contrast, the revenues at high-end casinos attracting VIP play and foreign tourists, plus those doing business overseas, may be a little more insulated.

Very simply stated, I feel that the rather modest declines in U.S. gaming revenue do not warrant the steep declines in stock prices we’ve witnessed. Regardless of the overall economy, in time, gaming stocks as a whole should “revert to the mean” as they have been strong performers for many years and recent poor performance is certainly out of the norm. International growth continues. Manufacturers still have great opportunities. Some analysts estimate that 120,000 to 140,000 slot machines should be added domestically in the next three years with huge expansions in California and Florida plus new casino openings in Nevada, Pennsylvania and some smaller states. The huge replacement cycle around server-based gaming is still coming — sometime.

On a more controversial note, I have a number of not-so-obvious reasons to believe that casino stocks should bounce back from their current lousy state — year-over-year comparables, moderated investor and analyst expectations and lowered corporate guidance. Revenue expectations have been reduced. Corporate earnings guidance and analyst estimates have all turned more conservative. As we move through the summer months and then into fall and winter, comps will become much more favorable. Very soon, the periods we have to “beat” will be the weaker time periods we’ve been suffering through. There’s no compelling reason to think that gaming revenues will continue to decline from already reduced levels. Serious gamblers will continue to gamble. VIP gamblers will continue to gamble. Convention business will continue to bring in new visitors. Foreign tourists will continue to gamble. (Remember that the weak U.S. dollar has caused much higher than usual visitation from foreign tourists.)

Beating weaker numbers shouldn’t be anything to get too excited about, but beating the previous year’s numbers is all that is needed to show growth — especially in a market starved for good news. igwb

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. Funds managed by the author hold positions in LVS, MGM, WYNN, MPEL, PENN, BYD, PNK, IGT, SGMS, BYI and WMS.