I started covering casino stocks as a securities analyst around 1980. At that time, Atlantic City was still the hot, fast-growing market that investors focused on, although the bloom there was already coming off the rose. Las Vegas was a backwater. Neither Singaporean nor Australian casinos existed (legal ones, anyway). Macau, then a Portuguese colony, was a Ho-family monopoly.
In those days, casino operators basically gave away food, hotel rooms and entertainment. Non-gaming operations were cost centers, existing solely to induce customers to visit the gaming floors. That situation has changed dramatically over the years. In pre-Great Recession Las Vegas, which is the gold standard for today’s global gaming industry, non-gambling operations had risen to equal importance–and profitability–with the gaming floors.
It’s not so much that I find the gambling activities themselves so interesting. As a professional portfolio manager, they used to remind me a lot of work–but with substantially diminished chances of making money.
Instead, what attracted me to casino stocks as an investor–and still does– is that:
–casinos are very cash generative once they’re up and running, and
–they’re relatively simple to analyze.
Under most circumstances, growth in gambling revenue is a direct function of two variables. They are: the increase in nominal GDP of the area where target customers live; and any increase in casino floor space. So gains in gambling earnings are highly predictable. Resort profits aren’t as easy to project, but they’re not much more difficult, either.
One caveat: like many commercial property-based businesses, expansion of Las Vegas-style casinos only comes in $1 billion-plus increments. So the gaming industry can be subject to periodic bouts of overcapacity, when, after a run of profitable years, everybody in a certain area decides to make a major expansion at the same time. Think of the current situation in Las Vegas–although that’s by far the worst overcapacity I’ve ever seen.
Funnily enough, it’s precisely the disastrous last-decade expansion in Las Vegas and the current slowdown of gambling in Macau, where the Big Three of American casinos (Wynn, Sands and MGM) all have operations, that make WYNN and LVS attractive. (As regular readers will be aware, I’m not a fan of MGM.)
Why? The companies are generating tons of cash and they have no place to plow it back in to new casinos.
In the case of LVS, this means it’s repaying borrowings much faster than I think the consensus realizes. As for WYNN, the company has just announced a special dividend of $7 a share. It’s increasing the regular quarterly payout as well, from $.50 to $1. This means the shares have a prospective yield of 3.4%.
More on WYNN tomorrow.