A Closer Look at Casino Stocks

There's no place quite like the seductive lure of the inside of a casino. Banks of inviting slot machines stretch to the horizon, filling the air with the unmistakable sound of whirring reels and ringing bells. Enthusiastic players scramble to place stacks of colorful chips on top of their favorite roulette numbers (I've always liked 17 and 20) before the croupier can yell, "No more bets!" Scantily clad cocktail waitresses make the rounds from table to table, plying boisterous customers with free drinks as they encourage the cards or dice to fall their way.

For all of the excitement, though, most of us are sadly aware of one cold, hard truth -- at the end of the day, a good chunk of our cash always seems to find its way back to the dealer's side of the table. Without a doubt, the immutable laws of mathematics are in the house's favor, so why not put their power to work within your own portfolio?

For those who have ever wondered just how profitable it might be to place your bets on the other side of the table, this series is for you.

First, I'll discuss how the gaming industry has evolved over the past decade and take a closer look at the major players. Although much of this information is fairly introductory, it never hurts to brush up on the basics. In the follow-up installments, we'll get our hands dirty and actually explore the nuts and bolts of the business.

Not your father's casino
For anyone who hasn't been paying attention, gaming has become a much more mainstream and socially accepted form of recreation over the past decade. Yes, Atlantic City has enjoyed a resurgence in recent years, and the Las Vegas strip has virtually exploded, but no longer is casino gambling relegated to those two far-flung corners of the country.

One by one, many cash-strapped states have turned to gaming as a reliable source of tax revenues. In fact, the 455 commercial casinos in operation last year generated more than $4.9 billion for state and local governments. As casino gaming has rapidly spread into the heartland of the country, the industry has undergone several seismic shifts.

First, the introduction of new gaming jurisdictions has opened up many previously untapped markets in major metropolitan areas up and down the Mississippi River and along the Gulf Coast. At the same time, the proliferation of casinos (and racinos) has brought gambling to the masses -- adding new players to the ranks on a daily basis.

What does this all mean for casino operators? A larger base of customers, and more places to extract money from them. Consider these two facts:

Last year, more than 55 million Americans visited a casino, or approximately one in every four adults. Together, they spent around $30 billion at the nation's casinos, more than the total amount taken in at the box office.

As the table below shows, gaming has spread far and wide beyond the borders of Nevada and New Jersey.

City/Region

2005 Gross Revenues

1. Las Vegas Strip

$6 billion

2. Atlantic City, N.J.

$5 billion

3. Chicagoland, Ind./Ill.

$2.4 billion

4. Detroit

$1.2 billion

5. Tunica, Miss.

$1.2 billion

6. Connecticut

$1 billion

7. St. Louis, Mo.

$1 billion

8. Reno, Nev.

$0.9 billion

9. Boulder Strip, Nev.

$0.8 billion

10. Shreveport/ Bossier, La.

$0.8 billion

11. Lawrenceburg, Ind.

$0.7 billion

12. Kansas City, Mo.

$0.7 billion

13. Downtown Las Vegas

$0.7 billion

14. Laughlin, Nev.

$0.6 billion

15. Biloxi, Miss.

$0.6 billion

16. New Orleans

$0.5 billion



How do you say "jackpot" in Russian?
Of course, many other cultures around the world also share our healthy appetite for gaming. Even Moscow has more than a few slot parlors these days. Given this widespread appeal, a number of countries (like those in the heavily regulated United Kingdom) have decided to relax outdated gaming restrictions, while others have welcomed the construction of new casino resorts as a guaranteed way to spur tourism and raise money.

Singapore, for example, has recently lifted a decades-old ban on casinos and solicited bids from the world's leading developers to build two multibillion-dollar waterfront resorts. With competition heating up to attract the business of increasingly affluent Asian tourists, nearby nations like Japan, Taiwan, and Thailand are widely expected to follow its lead.

However, the most promising region is Macau -- widely referred to as the "Las Vegas of the East" -- where more than 18 million players (including a few dozen of the world's biggest high rollers) came to do battle with the tables last year. Although just a tiny speck of land jutting out into the South China Sea, Macau currently generates more than $5 billion in annual gaming revenues -- a total that could easily double over the next five years.

As the expanding Chinese middle class gets its first taste of Las Vegas-style entertainment, Macau is positioned to become the world's premier gaming destination within the next few years. None of this has escaped the attention of foreign developers, who are busily transforming the region into a world-class tourist destination. One Australian partnership recently shelled out a jaw-dropping $900 million just to get its foot in the door.

All told, as gaming markets continue to flourish at home and overseas, worldwide annual gaming receipts are projected to surpass $100 billion by the end of the decade.

Meet the players
Meanwhile, shareholders are poised to cash in on the expansion, as rapid consolidation in recent years has altered the balance of power, leaving only a handful of publicly traded players to compete for an ever-increasing prize. Here are the largest, listed by market capitalization:

Company

Market Cap
(billions)

2005 Rev.
(billions)

2005 Op. Income
(millions)

EV/
EBITDA

Las VegasSands (NYSE: LVS  )

$24.4

$1.7

$352

40.4

Harrah's (NYSE: HET  )

$14.6

$7.1

$976

11.9

MGM Mirage (NYSE: MGM  )

$12.1

$6.5

$1,357

11.1

Wynn Resorts
(Nasdaq: WYNN  )

$7.4

$0.7

($25)

51.3

Boyd Gaming (NYSE: BYD  )

$6.5

$2.2

$402

9.9

Station Casinos (NYSE: STN  )

$5

$1.1

$347

15.9

Penn National (Nasdaq: PENN  ) $3.2 $1.4 $225.5 12.6

Pinnacle Entertainment

$1.4

$0.7

$34

12.2

Ameristar Casinos (Nasdaq: ASCA  )

$1.2

$0.9

$166

7.7

*Aztar was not listed because of its pending merger.

Las VegasSands: Owner of the Venetian Resort in Las Vegas and the first American company to break into the Macau market. Owner Sheldon Adelson is currently working on the high-end Palazzo in Las Vegas and has big development plans in store for the Cotai Strip of Macau.

Harrah's Entertainment: Following its landmark merger with Caesar's, Harrah's is now the world's largest and most geographically diversified casino operator, with 39 properties in the U.S. and expansion plans under way in exotic locales ranging from the Bahamas to Europe. The company pioneered the concept of player tracking, and its "Total Rewards" program is a marketing juggernaut. Harrah's also owns the lucrative rights to the World Series of Poker.

MGM Mirage: After acquiring Mandalay Resorts, MGM has become the dominant force on the red-hot Las Vegas strip, controlling nearly half of its hotel rooms and around one-third of its slot machines. The company has carved out a niche at the high end of the market, and it holds the keys to many of the industry's most luxurious resorts, including Mandalay Bay, Bellagio, and Biloxi's Beau Rivage. Next up for MGM is Project CityCenter -- an ambitious undertaking, even by Las Vegas standards.

Wynn Resorts: The brainchild of Steve Wynn, the man responsible for transforming Las Vegas into the tourist destination it is today. Wynn's namesake resort (which carried an unprecedented $2.6 billion price tag) sets the standard for luxury and elegance. The 2,700-room resort, which commands the highest daily room rates in Las Vegas, features a 15-story man-made mountain, two dozen upscale eateries, an art gallery, a Ferrari dealership, and a Tom-Fazio designed golf course.

Boyd Gaming: Like its two bigger rivals, Boyd owes much of its recent success to a key acquisition, with the purchase of Coast Casinos making the firm a premier provider of locals entertainment. Boyd also co-manages the Borgata, Atlantic City's top resort, and is anticipating the opening of the $4 billion Echelon Place project on the Las Vegas strip.

Station Casinos: Like Boyd, Station has profited handsomely from catering to Las Vegas residents who live in the suburbs and want to avoid the hustle and bustle of the strip. The Las Vegas metro area has been booming for more than a decade, and around 6,000 people move to the region every month. Station owns around a dozen casinos, including the lavish new Red Rock Station west of town.

Penn National: Penn owns and operates a diversifed portfolio of regional gaming and horse racing properties. The firm's flagship racino in Charles Town, W.Va., features 118,000 square feet of gaming space, as well as live thoroughbred racing. The company also operates several race tracks and off-track betting facilities in Pennsylvania, Maine, and Ohio. Following its $2.2 billion acquisition of Argosy gaming last October, Penn has also become a leading riverboat operator, with more than a dozen casinos in the Midwest and Gulf Coast.

Pinnacle Entertainment: Pinnacle is a leading riverboat operator. The company manages Boomtown-branded resorts in New Orleans, Bossier City, and Reno, as well as the Belterra Resort in southern Indiana and the new L'auberge Du Lac in Lake Charles, La. After coming up short in the fierce bidding war for Aztar, Pinnacle will pocket $78 million in breakup fees and expenses and proceed with two new projects in the St. Louis area.

Ameristar: Ameristar is another major riverboat player, with seven properties spread throughout Colorado, Iowa, Mississippi, Missouri, and Nevada. The company's leading resort is located near St. Louis and features a spacious 130,000 square-foot casino offering 3,200 slot machines, 90 table games, and a 19-table poker room.

Stay tuned
Now that you've been properly introduced to the leading casino operators, next we'll discover how all those billions of dollars in revenues find their way into the industry's coffers.

Until then, here's a random shuffle of some more Foolish gaming analysis:

Ameristar is a Motley Fool Hidden Gems recommendation. Take the newsletter dedicated to the best small caps for a 30-day free trial.

Fool contributor Nathan Slaughter once cashed out a jackpot of 100 credits on a penny slot. He owns shares of Boyd Gaming but of none of the other companies mentioned. Even card-counters can't thwart the Fool's disclosure policy.


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