A Closer Look at Casino Stocks: Part 2

If you haven't read this background information yet, take a few minutes and get caught up -- I'll just shuffle a deck of cards here until you get back. OK, if everyone is ready, now it's time to dig deeper and explore the mechanics of the casino industry.

It's all about the math
Imagine, for a moment, a business that needs to hire an entire staff of workers just to empty the contents of box after box after box -- all stuffed with bills of large denominations. Or a crew that spends much of its day in a hidden room counting mountains of currency.

At this point, you might be wondering just how much money the average table or slot machine rakes in every day. Before answering that question, it's worth taking a minute to point out that casino revenues have little to do with gambling and more to do with math and volume.

Take blackjack, for example -- a game that offers some of the most player-friendly odds on the casino floor. Depending on the number of decks in play and how liberal the table rules are, some versions carry a built-in advantage as small as 0.18%, although such games are becoming increasingly harder to find.

Those using basic strategy (knowing when to hit, stand, double-down, etc.) can reduce the house edge considerably, but only a tiny fraction of players -- less than one-half of 1% -- are accomplished enough to make all the right moves. The average player (think Clark Griswold in Vegas Vacation) surrenders a far greater percentage of his wagers to the casino.

Assuming a 2.5% house edge, a player will lose $2.50 for every $100 wagered, leaving him with $97.50. However, a 2.5% advantage within a casino is much more powerful than a 2.5% markup somewhere else -- like, say, a low-margin grocery store.

The longer a player sits at the table, the more the house edge will eventually whittle down his bankroll. After another round of play, that same player might find that his $97.50 has been reduced to just $95.06. Because casinos tend to grind out more wins over time, the actual hold (winnings retained as a percentage of total buy-ins, or "drop") at a blackjack table routinely reaches 15% or more.

$7,395 isn't bad for a day's work
Now, visualize a resort that features dozens of blackjack tables teeming with players at all hours of the day, and it's easy to see how a seemingly small advantage can lead to some serious money. And remember, blackjack odds are among the most favorable on the casino floor. Several-ill-advised games like keno carry double-digit house advantages.

So let's get back to the original question: How much money can a typical table rake in during the course of a day? Well, that figure obviously varies quite a bit, depending on table volume, size of the average wager, and other factors.

For illustrative purposes, why not start at the top and take a closer look at the recent first-quarter results reported by Wynn Resorts (NYSE: WYNN  ) . Over the last three months, players at the company's signature resort wagered a total of approximately $490 million at its 146 table games. Factoring in a relatively unlucky hold of 19.8% (at the low end of the firm's expected range), that still works out to an impressive per-table win of $7,395 per day.

Of course, a quiet $5 minimum table at a low-end resort is unlikely to generate anything near that level of production. Also, keep in mind that table wins are largely a function of hold and thus subject to the whims of Lady Luck. While hold is fairly predictable over long periods, it can fluctuate substantially from quarter to quarter. Therefore, per-unit wins might not always be the best gauge of a property's true growth, so it's generally a good idea to also keep an eye on the drop figure, which should ideally be trending higher.

One-armed bandits are more dangerous than ever
While a VIP customer (known as a whale in casino parlance) might spend hours at the tables wagering $50,000 (or more) per hand, it's actually the slot machines that generate the bulk of the revenues these days. In fact, Atlantic City gamblers lost $324.2 million in slot machines during the month of April -- nearly triple the $116 million spent at the tables.

There are several reasons to explain this shift, not the least of which is the surging popularity of next-generation video slots manufactured by companies like International Game Technologies (NYSE: IGT  ) . Driven by addictive multilevel bonus rounds, pop-culture tie-ins, and eye-popping progressive jackpots, slot demand is now stronger than ever.

At the same time, slots also tend to eat a relatively high percentage of the money pumped into them (2%-15%), particularly for the tighter penny and nickel varieties. Furthermore, without any of the distractions (like shuffling) found at the tables, players can feed these ravenous machines at a dizzying pace -- hitting the "spin reels" button more than 1,000 times per hour.

To put a dollar figure on this trend, Las Vegas Sands (NYSE: LVS  ) announced that total slot handle at its Venetian resort rose 5% to $530 million last quarter, driving average daily wins at the property's 1,741 machines up sharply to $213. While that figure stacks up pretty well against many of the Venetian's Las Vegas neighbors, it falls well short of Borgata -- one of the hottest and highest-grossing casinos in Atlantic City. The resort, which is a joint venture between Boyd Gaming (NYSE: BYD  ) and MGM Mirage (NYSE: MGM  ) , tallied impressive average daily slot wins in excess of $336 last year.

Would you like steak with your blackjack?
Up until now, we've spent all of our time discussing the inner workings of a casino. But some of you might be surprised to learn that many companies are now capturing the majority of their revenues off the casino floor -- particularly in the entertainment capital of Las Vegas.

For the most part, the days of cheap rooms, $1.99 buffets, and second-rate entertainment on the Strip are long gone. Once used as loss leaders to attract gamblers, these ancillary operations have suddenly become profit centers of their own. Las Vegas is now home to world-class cuisine, full-service spas, headline performers, and acres of upscale shopping venues. In fact, new megadevelopments like Project CityCenter place nearly all of the focus on non-gaming features.

Over the last decade, casino operators have pumped billions into amenity-laden attractions to help differentiate their properties. After all, a tourist can play craps anywhere, but must visit Harrah's (NYSE: HET  ) Paris to dine at the Eiffel Tower, or the Las Vegas Hilton to get beamed up to the starship Enterprise.

Not surprisingly, this spending has created a significant impact on the revenue composition of the industry. With comfortable hotel rooms and plenty of activities to keep guests busy, the construction of destination resorts has encouraged visitors to stick around longer -- and spend more during their stay.

According to the Las Vegas Convention and Visitors Authority (LVCVA), the average Strip visitor now spends $627 in the casinos, $248 on meals and drinks, and another $124 shopping. As a proxy for the health of the Strip, MGM's latest quarterly results provide a perfect example.

Department

Q2 2006 Revenues (millions)

Q2 2005 Revenues (millions)

Casino

$847

$614.8

Rooms

$520.2

$274

Food & Beverage

$386.7

$243.5

Retail

$99.7

$88.1

Entertainment

$66.6

$44.9

Other

$123.4

$60.8

Total

$2,043.6

$1,326.2



As the chart shows, MGM's non-gaming operations generated more than $1 billion in revenues last quarter -- or approximately 55% of the total. On a same-store basis (excluding the impact of the Mandalay merger), revenues produced outside the casino rose at twice the rate of those within.

To a lesser extent, this shift is being repeated in many other markets, particularly Atlantic City -- which once attracted almost nothing but day-trippers.

By definition, the industry will always be casino-centric, but as companies continue to expand and upgrade their offerings, expect non-gaming operations to be a key source of growth (and diversity) in the years ahead.

Don't miss the exciting conclusion.
At this point, I've outlined many reasons why the chips have continued to pile up for casino companies over the last several years. But will shareholders be able to say the same thing a few years from now? Stay tuned.

In the meantime, sharpen your skills even more by reading these:

If you're interested in casino stocks,Motley Fool Hidden Gemshas recommended Ameristar. Take the newsletter dedicated to the best small caps in every sector for a 30-day free spin.

Fool contributor Nathan Slaughter once walked from the Stratosphere to the Monte Carlo -- and recommends taking a cab. He owns shares of BYD and IGT, but none of the other companies mentioned. The Fool has an ironclad disclosure policy.


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