Sin stocks: Take a shot and roll the dice - ANDREW ALLENTUCK

Casinos and weapons are the high-tech components of the sin stocks sector. After all, gambling combines elements of mathematics and showmanship, architecture and technology while weapons -- from pistols to machine guns to warplanes -- embody varying amounts of advance technology. For the investor, the appetite of the two sectors for capital creates opportunities and risks.
Casinos are not what they used to be. The hoods that once owned them are gone. Food at giveaway prices and free floor shows are memories. The gambling palazzos of Las Vegas have become combo shopping malls, entertainment extravaganzas and, of course, places at which the luckless can be fleeced. Now customers pay for the fringe benefits that go with a chance to lose money at the tables. The result is a high-margin business, said Nico Cape, a vice-president and analyst at Sceptre Investment Counsel Ltd. in Toronto. "With the growth of casinos into entertainment businesses, the net spend per customer has gone up considerably."
Casino stock prices have also been pushed up by technical factors in the sector. A wave of mergers and acquisitions has reduced the number of major casinos that trade publicly. But that trend has been good for casino stock prices.
Las Vegas Sands Corp. (LVS-NYSE) owns a casino empire that includes The Venetian, internet gambling company Venetian Interactive, and Venetian Macao in China. The stock trades at nearly 65 times 2006 earnings of $1.25 (U.S.) a share, up 50.6 per cent from 83 cents in 2005. The market expects Sands to do in Macao what it took the company 50 years to do in Nevada, Mr. Cape said.
MGM Mirage Inc. (MGM-NYSE) owns the MGM Grand Hotel & Casino, Bellagio, Mirage, New York-New York and other properties in Nevada. It trades at 28.4 times 2006 earnings of $2.29 a share, up from $1.56 a year earlier. The stock is a more U.S. play than Sands.
Harrah's Entertainment Inc. (HET-NYSE) is a purer casino play than other major industry operators. At 25.5 times trailing earnings of $3.29 a share, it is due to be taken over by private equity investors led by Texas Pacific Group and Apollo Management LP, subject to an April vote by shareholders.
Great Canadian Gaming Corp. (GCD-TSX) operates casinos in British Columbia and Washington state. Revenue for the 12 months ended Sept. 30, 2006, rose 44.8 per cent from a year earlier, but the company ended the period with a loss of 18 cents (Canadian) a share. Casino growth in Canada appears to be limited, said Sebastian van Berkom, an institutional fund manager in Montreal. "Governments across Canada have put moratoria on new casinos," he said.
Weapons makers can be divided into traditional manufacturers of hunting weapons and other firms that make military weapons. For the investor interested in buying the stocks, the problem is finding relatively focused, pure plays.
Boeing Co. (BA-NYSE) is a massive aerospace company that makes passenger planes, fighter jets, combat helicopters and military cargo planes. The company has been going through a difficult period, with profit dropping 13.9 per cent in 2006. For those who want to invest in defence, the company is a mixed blessing, for its civilian operations dilute military sales.
General Dynamics Corp. (GD-NYSE) is a major defence contractor. It makes submarines that carry guided missiles, land warfare information systems, naval vessels and data systems that are used throughout the U.S. armed forces and its allies. Revenue rose 13.4 per cent in 2006 while profit per share gained 26 per cent.
Sturm Ruger & Co. Inc. (RGR-NYSE) makes pistols and rifles. Analysts expect 2007 profit to rise to 36 cents (U.S.) a share from 20 cents last year. That would represent a turnaround for the company, which has gone through a period of slumping earnings.
Smith & Wesson Holding Corp. (SWHC-NASDAQ) makes handguns and handcuffs for the U.S. military and police forces. With military engagements up and crime thriving, business ought to be good. Smith & Wesson trades at a lofty multiple of 40 times estimated 2007 earnings.
Ceramic Protection Corp. (CEP-TSX) is a Calgary-based company that makes anti-weapons, that is, ballistic inserts for bulletproof vests used by police and soldiers. Earnings are climbing, with analysts projecting a profit gain to $1.98 (Canadian) a share from $1.31 a year earlier. Call this an anti-weapon business and it's hard to see a moral objection.