Casino industry bellwether Harrah's reported second-quarter earnings this morning that were a full nickel light of the consensus profit estimates. It blamed being unlucky at one of its Las Vegas resorts for the shortfall, illustrating the short-term statistical fluctuations that often affect casinos. Looking at the long-term, Harrah's remains one of the strongest companies in the gaming industry.
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Rio loses in Q2
What this really means is that players at the Rio were much luckier than they typically have been, and this significantly decreased profitability at this particular property. In 1999's second quarter, Rio produced revenue of $115.2 million and operating profits of $15.9 million. This year, the numbers were down to $92.6 million and negative $9.7 million, respectively.
Harrah's problems at Rio perfectly illustrate the fact that this, after all, is the casino industry, and short-term statistical fluctuations in how much players win or lose can certainly impact a company's bottom line. Over the long run, the fluctuations will level themselves out, but in the short-run gaming companies can sometimes find themselves at the whim of lady luck.
Players' luck as a scapegoat
Looking forward, not much was revealed at Harrah's this morning that should really affect the company's long-term outlook. Harrah's remains one of the strongest in the industry with its 21 casinos geographically spread across the country and the only nationwide player loyalty program, Total Rewards.
Gaming "blue chip" should meet full-year expectations
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The company pointed its finger at the unusually low table-hold percentage at the company's Rio resort in Las Vegas for its shortfall. Instead of "holding" -- winning -- the historical 20% or so of all dollars that are plunked down at the tables, Rio only held 8.4% in the second quarter.
It should come as little surprise that the casino companies love to use their players' luck as a scapegoat for poor earnings. On the other hand, when the casinos see winnings at the tables that are above the statistical norm, they love to take credit for it, contributing it to "operational excellence." Investors in the industry should look beyond both types of statistical fluctuations to get a sense of a casino company's true cash-generating ability.
The company said assuming all trends return to normal, it should be able to achieve Wall Street's $1.68 earnings estimate for the full year. Being one of the gaming industry's blue chips and only trading at 13x forward earnings estimates, Harrah's is as good a place as any to start looking into the gaming industry.
Who do you think is the absolute strongest company in the gaming industry? Harrah's? Mandalay Bay (NYSE: MBG)? MGM Grand (NYSE: MGG)? Park Place (NYSE: PPE)? Take our poll and offer your thoughts on the Gaming discussion board.
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