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Michael Brush

Company Focus1/28/2009 12:01 AM ET

Tough times for porn, booze

Even sin isn't secure anymore. Gambling, sex, cigarettes and alcohol are among the supposedly recession-proof businesses hit hard by the economic downturn.

By Michael Brush
MSN Money

In this economy, even the wages of sin aren't what they used to be.

Market lore says people keep spending on sex, booze, butts and slots in hard times, no matter what. Sin is supposedly recession-proof.

But the widespread weakness among so-called sin stocks suggests the downturn has converted a lot of sinners into saints.

Playboy Enterprises (PLA, news, msgs) stock is down about 80% in the past year, twice the 40% decline of the S&P 500 Index ($INX). Casino operator Las Vegas Sands (LVS, news, msgs) is down more than 90%. And alcohol stocks such as Diageo (DEO, news, msgs) and Constellation Brands (STZ, news, msgs) have done little better than the market.

The Vice Fund (VICEX), which invests in many of these industries, hasn't done any better that the S&P 500 over the past year. A gaming and casino fund run by Ladenburg Thalmann closed in December.

All of this suggests Hustler publisher Larry Flynt might not have been kidding after all earlier this month when he asked Washington for a $5 billion "stimulus" package for the porn industry. Strippers, card dealers and bartenders are hurting just like, well, Wall Street bankers.

Still smoking and drinking

Satan isn't on the mat just yet, though. A close peep into these industries reveals:

  • People are cutting back on porn, strippers and gambling.

  • They're spending about as much as ever on booze and cigarettes, though drinkers may be trading down to the cheaper stuff.

For investors, this means the safer bets are on companies that satisfy those vices people are still feeding: butts and booze. Many of those stocks have been hammered in this market anyway, so they may even be bargains.

With humans being what they are, a return to good times will likely bring back robust spending on porn and gambling. But with a rebound in the economy and consumer spending still far off, it's probably too early to buy these stocks in these sectors.

Sex sells, but less than before

The downturn has been hard on smut vendors and strippers.

Playboy, that iconic purveyor of bunnies, hasn't flashed its fourth-quarter results yet, but the writing is on the wall. Last week, Hugh Hefner's company announced job cuts. More ominously, it is writing down at least $100 million in assets.

This is troubling because under accounting rules, companies must take assets off the books when they are deemed worthless because they won't produce revenue. So Playboy is "telling you what financial performance will look like for the next year," and it is saying it's going to be bad, says one analyst who follows the company.

Like Playboy, Private Media Group (PRVT, news, msgs), a porn company based in Barcelona, Spain, saw revenue drop in the third quarter. "We are all getting hit. Everybody's being affected by the recession," Private Media operations chief Peter Cohen says.

And at Rick's Cabaret International (RICK, news, msgs), a chain of high-end strip joints, revenue at clubs open more than a year was flat in the fourth quarter, compared with a 14.6% gain in the previous 12 months.

Business at strip clubs in several markets is still strong, though. One of those is New York City, so you have to wonder if bank-bailout money is finding its way into garter belts. Allan Priaulx of Rick's attributes his clubs' relative strength to a "flight to quality," meaning that pole dancer fans on a budget choose high-end clubs like Rick's rather than take a chance on a dive.

Profit margins are also getting squeezed. Feeling the pinch of the recession, big spenders are pulling back on premium drinks and lap dances. "We don't have that person who's spending $2,000 or $3,000 in a night as often as they used to," VCG Holding (VCGH, news, msgs) chief Troy Lowrie told investors in a November conference call. VCG, which runs about 20 clubs in 10 states, saw revenue fall in the third quarter.

The recession has at least one upside for strip clubs. "There are more beautiful girls that come out in a poor economy," Lowrie says. "The person that might have lost their $50,000-a-year secretarial job is now a gorgeous entertainer for us."

Video on MSN Money

CNBC
Bailout? Were the porn kings serious?
Larry Flynt and the 'Girls Gone Wild' creator recently asked the government for federal assistance. (Jan. 7)

Gambling

The recession has even been worse at the slot machines. Last year, the gaming take in Las Vegas was down more than 6%, and the number of visitors fell 4%.

But consumer spending is only half the double whammy that sent some gaming stocks down by 60% to 90% over the past year. The credit crunch arrived just as many gaming companies were in the middle of aggressive expansions funded by lots of debt.

They have little hope of turning profits on new casinos soon, but they still have the debt. "We see projects on the Las Vegas strip and even in Macau standing half-built," says Charles Norton, the manager of the Vice Fund. "Companies are choking on their balance sheets."

Continued: 'It's going to be pretty tough until 2010'

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