The basic business of casinos is that they operate games of chance that are tilted in their favor. There are, of course, hotel rooms, fancy clubs, and restaurants that augment the experience, but the casino usually dominates a resort’s focus. And if your business is games of chance that means chance plays a role in your financial results.
When quarterly results are released, usually the headlines will read that a company was either lucky, or unlucky in a quarter. But what does that mean and how do investors decipher just how luck plays into their investments? There are a few definitions we need to understand before we get into numbers. The information below is from Las Vegas Sands (NYSE: LVS), but will be similar for all casino companies.
- Rolling chip win percentage: This is usually reserved for VIP play and is the “non-negotiable gaming chips wagered and lost.”
- Table drop: This is a volume measurement representing “the sum of markers issued (credit instruments) less markers paid at the table, plus cash deposited in the table drop box.”
- Non-rolling chip win percentage: This usually refers to non-VIP players and is the win percentage of the table drop.
- Slot handle: “The gross amount wagered for the period” for slot machines.
- Slot hold percentage: This is the percent of the slot handle that the casino wins.
Because of the different bases of calculation, a casino’s rolling chip win percentage and non-rolling chip win percentage aren’t comparable at all, even though they sound like they should be. And depending on what tables and slots are on a casino floor, the expected win percentage can change for each casino. International Game Technology (NYSE: IGT), WMS Industries (NYSE: WMS), and Shuffle Master’s (Nasdaq: SHFL) products all have different odds that play into what a casino can expect to make in revenue.
To show how companies actually report these numbers, I’ve provided the win percentages and expected win percentages at Venetian Macau in the first quarter.
| Actual Win | Expected Win | |
|---|---|---|
| Rolling Chip Win Percentage | 2.69% | 2.7%-3% (expected) |
| Non-Rolling Win Percentage | 27.9% | 26.2% (TTM average) |
| Slot Hold Percentage | 6.9% | 7.1% (TTM average) |
Source: Company filing
The Venetian Macau looks like it’s about in line with what we might expect, but sometimes a casino gets very lucky. Wynn Resorts (Nasdaq: WYNN) has had a lot of luck in recent quarters, and the first quarter of 2011 was no different. At mass tables (non-rolling win) Wynn had a win percentage of 27.9%, far exceeding the expected range of 21%-23% at its casino. To understand just how this plays into results, we need to calculate how it affects revenue.
Turning volume into profits
As an example, I’ll again turn to the Venetian Macau’s first-quarter results. As I showed above, luck wasn’t out of line in the first quarter, but there are still millions of dollars of variation in revenue even with a small change in luck.
| Rolling Chip | Non-Rolling Chip | Slot Handle | |
|---|---|---|---|
| Volume | $12,389.0 Million | $980.6 Million | $743.1 Million |
| Actual Win Percentage | 2.69% | 27.9% | 6.9% |
| Actual Gaming Loss | $333.3 Million | $273.6 Million | $51.3 Million |
| Expected Win Percentage | 2.85% | 26.2% | 7.1% |
| Expected Gaming Win | $353.1 Million | $256.9 Million | $52.8 Million |
| Difference | -$19.8 Million | $16.7 Million | -$1.5 Million |
Source: Company filing
Notice that I called this gaming loss and not revenue. That’s because these numbers are calculated before discounts and commissions (also known as the perks of being a big-time gambler). The house pays you to play.
That is also why the actual gaming loss total of $658.1 million doesn’t match the Venetian Macau’s casino revenue of $553.4 million.
In an unlucky quarter at Marina Bay Sands, Las Vegas Sands management estimated it would have made $26.5 million more in EBITDA, had luck been as expected.
Putting luck on your side
Gambling odds are still in your favor when you own the casino, but quarter-to-quarter they can have a big impact on results, especially when you rely on VIP play. Las Vegas Sands, Wynn Resorts, Melco Crown (Nasdaq: MPEL), and MGM Resorts (NYSE: MGM) all rely heavily on VIPs in Macau, which can swing results in the short-term, so watch how gaming win affects results.
Knowing how the odds work is just another tool investors need to know when investing in stocks built on a game of chance.
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