I've been having difficulty motivating myself to cover casino earnings these past couple of quarters, because, frankly, they've all been about the same. Pick any company in the game, and the story has been astounding growth, stellar earnings, skyrocketing room rates, and concurrently skyrocketing stock prices. And then, of course, there's my personal favorite: "Record operating results for any quarter in our company's history."
Blah, blah, blah.
For example, MGM Mirage (NYSE:MGM) last week reported that second-quarter revenues climbed 60%, thanks mostly to its acquisition of Mandalay Resort Group. Only the Vegas Strip giant didn't really need the acquisition to impress, because Las Vegas is on fire and same-store revenue was up a healthy 11%. But to blame Las Vegas alone for MGM Mirage's exceptional performance is a copout, because the popularity of gaming in general is growing rapidly. Of course, the casual observer may instinctively point to the exponentially expanding party that poker has become, and he wouldn't necessarily be wrong.
Personally, I think the biggest culprit for the Las Vegas boom and the popularity of gaming in general -- hit TV shows like C.S.I. on Viacom's (NYSE:VIA) CBS and Las Vegas on General Electric's (NYSE:GE) NBC aside -- is the growing presence of corporate-owned riverboat casinos in states such as Mississippi, Missouri, Illinois, and Indiana. And then there are the 367-plus Native American-owned operations in 28 states. They generated $19.4 billion in gaming revenues during the Native Indian Gaming Commission's fiscal 2004.
Those Native American figures are actually a bit misleading, because most of those operations don't offer full-scale Las Vegas-style gaming. But the point is that casino games, such as blackjack, craps, and poker, are far more accessible to America's Average Joe than ever before, demystifying the concept of the casino and simultaneously raising the profile of Las Vegas, gaming's Mecca.
At the same time, gaming has expanded as states look to cash in easy tax dollars. Last summer, Pennsylvania made a huge splash when the state authorized the placement of up to 61,000 slot machines. This has casino operators such as Harrah's Entertainment (NYSE:HET), Penn National Gaming (NASDAQ:PENN), and Ameristar Casinos (NASDAQ:ASCA) drooling over the prospect of obtaining one of the state's 14 licenses. You see, outside the Las Vegas Strip, slot machines are the big money maker -- and they've become even more profitable with the implementation of coinless slot technology over the past couple of years.
As a result, the industry has prospered. Add in some merger activity in the rapidly consolidating industry, and you get an endless string of record quarters.
But alas, someone has finally hiccupped. Well, sort of, anyway.
Venetian trips Las Vegas Sands
Wednesday morning, Las Vegas Sands (NYSE:LVS) reported a "significant increase in net revenue," as net revenues climbed roughly 50% to $398.8 million in an "exceptional" second quarter "driven largely by record results at Sands Macao."
Actually, that's not quite accurate. Sands Macao -- in the red-hot Macau market near Hong Kong -- made up the entire difference in operating results. Overall, LVS saw property EBITDAR (earnings before interest, taxes, depreciation, and amortization, adjusted for pre-opening expenses at Sands Macao, corporate expenses, and rent) climb 37.5% to $151.5 million. The downside is that net revenues at the company's flagship Venetian Resort on the Las Vegas Strip actually fell slightly to $180.4 million from $184.6 million in last year's second quarter, while adjusted property EBITDAR dropped 15% to $66.5 million.
The issue here, however, isn't that Vegas turned cold. In fact, hotel revenues at The Venetian increased 4.8% to $83 million, the average daily rate (ADR) was up to $231 from $221 in last year's second quarter, and revenue per available room (RevPAR) was up to $228 from $218, as the occupancy rate remained relatively flat at 98.7%.
The holdup is that food and beverage revenues dropped 9.4% to $27.8 million, while casino revenues declined 3.3% to $73.7 million. On the casino side, despite the drop (casino lingo for total buy-ins at table games) increasing 13.7%, the company noted a lower than expected win percentage at 18.6%, compared with 21.1% in last year's second quarter and the "normal range" of 20% to 21%. Interestingly, the company also noted that in last year's second quarter, a single player put a whopping $33 million into play at $500-denomiated slot machines, which also helps to skewer comparisons a bit.
That said, the lack of growth on the gaming, as well as food and beverage, is probably at least partially attributable to the April 28 opening of top-end rival Wynn Resorts' (NASDAQ:WYNN) Wynn Las Vegas next door. (Wynn posted a GAAP loss due to pre-opening expenses on Monday, but gets a "bye" since it was the first quarter of operations. The company did show a pro forma profit.)
Growth at Sands Macao is overstated, as the property opened midway through the second quarter of 2004, and thus includes only about half a quarter's worth of results. But the property did show impressive sequential growth, as casino revenues gained 17.6% over the first quarter to $201.1 million, and adjusted property EBITDAR was up 19.5% sequentially to $81.0 million.
Stick to the "best players" and be mindful of value
Purely from a business standpoint, there aren't too many ways you can play the gaming business and lose. Even when Las Vegas Sands shows a weak spot, the company is still growing.
Of the Las Vegas Strip players, I certainly wouldn't mind owning Las Vegas Sands, Wynn Resorts, MGM Mirage, and Harrah's Entertainment shares, though I wouldn't necessarily go out and buy any of them right now at their current prices.
Then there's my favorite "non-buy" of them all, regional casino operator Ameristar Casinos, which itself reported "record second-quarter financial results and continued growth in all key performance measures" Wednesday afternoon. (True, the company technically missed estimates by a penny -- but as a long-term investor, I don't particularly care about that one way or another.) If you've missed any of my coverage of Ameristar, I suggest clicking here, here, here, and here.
But that's really the bottom line. There are several legitimate "best players" in the gaming industry, and I recommend sticking to them. Just be wary of valuations and buy with a margin of safety: If you're not sure you are getting value, then you are not getting value.
For more commentary by Jeff Hwang, check out:
- Red Flags: 3 Signs Your Stock May Crash
- From Poker to Investing: 10 Tips From the MCU
- From Poker to Investing: Always Look Ahead (Part II)
- From Poker to Investing: Don't Chase Losers (Part III)
- Rule Breaking With Less Risk
Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has an ironclad disclosure policy.
