The Casino Game [Fribble] May 3, 2000

Fribble The Casino Game

By Jim Koury
May 3, 2000

I just read an interview with Glenn Christenson, CFO of Station Casinos (NYSE: STN). His company is the "big player" among casinos that target the locals in Las Vegas. I live in Las Vegas and I am a casual player who patronizes a couple of the properties.

The tough question that must be asked is this: What is the typical gaming company doing to deliver value to the shareholders?

I ask this question because of my experience while owning the stock of a different casino company. A couple of years ago, I bought shares of Circus-Circus (now Mandalay Resorts) when they were building their Luxor property, and while they were getting good earnings from the Excalibur and Circus-Circus properties. My experience when their earnings dropped off was very discouraging. I watched the stock price tumble, while the company directors just sat there and wrung their hands and mumbled about how bad things were. I even called the investor relations department (and had a short conversation with their CFO) to suggest that the company consider repurchasing shares from the open market. He was not receptive to the idea. Nor was the company.

I believe that these companies use all their "earnings" to refurbish their properties, and that they don't accurately record the depreciation for those properties on their books. For several years, Circus-Circus had the reputation of generating enough cash flow to expand without resorting to borrowing to raise the needed money. But as they built their properties, the amount of debt went up. Station Casinos is in much the same situation now as Circus-Circus was in a few years ago. They have the "new" properties that attract the players, but that will change in a few years as these places start to show some signs of wear and tear, and as competitors build new properties.

The gaming industry is intensely competitive, with lots of potential to deliver earnings. It is said that a casino will deliver more earnings per square foot of floor space than any other building (maybe beating out even the virtual ones on the Web). But the potential to "skim" money from the till is pretty great. We should ask these people what they do to keep the profits from lining the pockets of the people in the company. I believe that most of the safeguards can be defeated, and that a lot of potential earnings are being lost. Further, there is not a lot more that the industry can do about it.

I was burned once, during the time that I owned Circus-Circus stock. I decided then that there is no real interest to deliver value to the shareholders. Indeed, I think the real function of the shareholders is to provide an aura of legitimacy to the business of gambling. It provides the illusion that anyone can be a part-owner of a casino through ownership of stock. But the only way that these companies (who in general pay no dividends) can deliver value to the shareholders is through price appreciation of their stock.

The casino industry, muck like the auto industry, expands and contracts with the economy. Just a few years ago, there was concern on the Las Vegas strip that there were too many hotel rooms out there for the number of visitors. Now we are in a time of expansion for those casinos who cater to the locals, but, since many competitors are piling on, this market will also be saturated in time.

In sum, I think that there are better places for Fools to invest.