Why New York casinos could crush Atlantic City

Boardwalk, Atlantic City.
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New Yorkers have approved an amendment that will allow seven casinos to open in the state, including one to three in the New York City area in seven years. And that could sound the death knell for Atlantic City, already struggling under the weight of regional competition.

Atlantic City should be "very concerned," said Chad Mollman, an analyst who covers casino and hotel stocks for Morningstar. "New York City is the biggest feeder market in Atlantic City. There is a question in terms of the viability of Atlantic City in the long term."

Resorts was the first legal casino on the East Coast when it opened in Atlantic City in 1978. A lot has changed since then.

"Atlantic City's time has come and gone," said Harold Vogel, the CEO of Vogel Capital Management and the author of the bedrock textbook "Entertainment Industry Economics: A Guide for Financial Analysis." "It was second after Nevada, and it was a special place in a small location. It had 10 good years when it was pretty unique, but then we got Indian casinos, and then gambling in Pennsylvania."

(Read more: Stronger than the storm? Maybe not Atlantic City)

Part of the rationale for opening casinos in New York has been that it will capture gambling money that has been going to Atlantic City and other places.

The New York Daily News reported that Gov. Andrew Cuomo made the case for the casino amendment by telling the press, "New Jersey has casinos. Connecticut has casinos. Pennsylvania has casinos. We literally hemorrhage people from the borders who go to casinos. I think it will keep the money in this state and I think it is a major economic development vehicle for the Hudson Valley especially and for upstate New York."

If New York money stops crossing the southern border, Atlantic City is in big trouble.

Richard "Skip" Bronson, the chairman of U.S. Digital Gaming and the author of "The War at the Shore," which chronicled his effort to build a luxury Mirage Resorts casino in Atlantic City, said New York casinos will make a bad situation even worse.

"There are only so many gambling dollars in the pot," Bronson said. "And there has been a massive proliferation of casinos throughout America. It's a form of real estate, and like any form of real estate, it goes through a cycle: Demand, saturation, and then glut. A place like Atlantic City has too many casino hotels and too many rooms. This is a fact of life."

Roll the dice on a casino?
Roll the dice on a casino?

If Atlantic City does slip into further decline, Caesars Entertainment could be deeply affected. The company owns four casinos there (Bally's Atlantic City, Caesars Atlantic City, Harrah's Atlantic City and Showboat Atlantic City), which have been a serious drag on earnings. The company lost $761 million in the third quarter, largely because of a massive write-down of Atlantic City assets.

"We continue to have a negative outlook for casino companies in the U.S. due to what we're seeing in regional casino markets, and Caesars is the most exposed to regional casino markets," Mollman said. He rates Caesars shares sell, and estimates their fair value (similar to a price target) at $9.

Yet, despite the fact that New York casinos are likely to hasten the demise of Atlantic City, Caesars donated $100,00 to the New York Jobs Now Committee, which supported the pro-casino amendment.

Caesars did not immediately respond to a request for comment.

(Read more: Science says casinos could make Wall Street riskier)

Of course, ignoring potential New York City casinos might be impossible.

"There isn't a gaming company in America that isn't paying attention to New York, and there's not a gaming company in America that's not interested in having an opportunity in New York," Bronson said.

New York casinos could still face an uncertain future because of the extent of regional competition.

"In an oversaturated market, now there's a much higher risk for people who will have to build up these casino palaces, and it's not clear that they'll be at all successful," Vogel told "This is how markets fall apart, and this is how you have bankruptcies."

—By CNBC's Alex Rosenberg. Follow him on Twitter @CNBCAlex.