GGB is committed to providing updated news and analysis on our weekly news site,

Changing The Formula

Measuring the success of gaming properties and companies has changed

Changing The Formula

Call it the Bellagio Effect.

It was once a given that a casino resort would generate cash flow exceeding 20 percent of the cost to build it.

Resorts were relatively inexpensive to build and quickly filled with gamblers.

In the final example of that time, New York-New York opened in 1997 at a cost of $485 million and generated $130 million in EBITDA its first year.

Then came the Bellagio. Steve Wynn invested $1.6 billion into what he promised would be the best hotel in the world. And gambling would not be the only way to make a profit. The old amenities-shows, restaurants, stores-would become upscale profit centers as resorts broadened their reach to free-spending, though often low-gambling, tourists.

It worked. Bellagio was and remains a great financial success.

What followed was to have been expected-imitation. Mandalay Bay, Venetian and Wynn came along. Each a billion-dollar-plus lure to upscale customers.

Soon, $1 billion or $2 billion wasn’t enough. Resorts of $3 billion, $5 billion and, when CityCenter is complete, $9.2 billion, filled drawing boards.

Of course, eventually supply exceeds demand, though developers in every industry don’t seem to know when that is until too late.

We appear to be there, with the weak economy and credit crunch making the excess all that much more visible, and shocking some companies into freezing projects already under construction, not to mention causing others to postpone or cancel grand plans.

The story can be told in simple percentages. (See Chart A.)

The numbers probably will get worse as mega projects, conceived in the era of easy money, come online: $2.9 billion Fontainebleau, $9.2 billion CityCenter, $3.9 billion Cosmopolitan.

Deutsche Bank analyst Bill Lerner said future cash flow returns are likely to be in the single digits, and some projects won’t generate enough money to meet their cost of debt.

Nor are investors likely to risk billions to earn single digits, especially today. Compounding the problems are higher interest rates.

How all of this plays out is uncertain.

Companies are trying to cut their debt loads by buying back loans at a discount. Station Casino note holders rejected their offer of 20-50 cents on the dollar. Isle of Capri found buyers at 55-58 cents.

Some companies will sell assets, as MGM Mirage did with TI for $775 million to Phil Ruffin.

Some will go belly up and back to lenders, like the still-unfinished Cosmopolitan.

Who will benefit? Those with cash and borrowing power. Penn National is always mentioned. So is Jack Binion. Neil Bluhm has bucks. And Boyd has the buying power, but also has its own unfinished project at Echelon.

Speculation turns to persons outside gaming, including international players. But that assumes the owners of such deep pockets would subject themselves to the intrusive licensing process.

Perhaps the surest result isn’t so much who, as what.

Americans are paying the price of living off way too much debt in every area-consumer, corporate, government. Unwinding is a long process.

Future growth may be muted by greater caution by both borrowers and lenders. Perhaps casino projects will scale back to be more like New York-New York and less like Cosmopolitan.

In that case, the owners of today’s upscale mega resorts will enjoy an oligopoly when the economy returns.

Until the lessons of overbuilding and over-borrowing are forgotten. But that could be a long, long time.

Price To Sales

All of this gets us to a favorite measure-price to sales.

If there’s an understandable yardstick, it is how much a stock costs compared to sales. P/S isn’t the definitive statistic, but it is a good starting point.

It can’t be manipulated like so many other stats, including earnings. And it shows the potential of a company when conditions normalize.

Right now, it’s showing a lot of potential for gamers.

In a world where stocks should routinely trade at 1.5 to twice sales, most are a fraction of that.

Consider the recent P/S ratios of what might be called the Big Four regional casino companies:

Ameristar            0.45

Boyd Gaming        0.24

Penn National Gaming    0.69

Pinnacle Entertainment     0.43

These stocks could double and still be cheap. They could quadruple and not be expensive. And they should survive for the return to normal.

The Big Three Las Vegas-Macau operators also sport low P/S ratios:

Las Vegas Sands     0.36

MGM Mirage    0.23

Wynn Resorts    1.04

Of course, they have to deal with the fear of over-building in Las Vegas, worries about Macau, and the high capital and operating costs of their upscale business models.

Suppliers have healthier numbers, perhaps reflecting investor belief that whether casinos make or lose money, they need slot machines and gaming tables.

As mentioned, price-to-sales is a starting point to be used with other fundamentals such as price-to-book and debt ratios to begin finding stocks that are cheap of companies that will survive.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll free: 1-866-683-4357 or online at

    Related Articles

  • Looking Ahead

    Investors are beginning to recognize that many gaming stocks are undervalued

  • Bad News, Good News

    Declining gaming earnings and subsequent stock declines were expected, but the result is good bargains

  • Diamonds in the Rough

    A few companies show the way to succeed in a flat market

  • Little Giants

    Several small-cap companies offer value in a bear market

  • Best in Class

    There are a few stocks that truly are investment-grade

    Recent Feature Articles

  • A Good Bet

    As AGS prepares to return to private ownership, stock analysts and industry experts acknowledge that the company’s future is a good bet, private or public.

  • Taxing Problem

    Wagering tax hikes could shrink markets, have unintended consequences.

  • Cashless Crescendo

    The ongoing migration to a cashless casino experience.

  • Hold for Gold, Spin to Win

    Why hold-and-spin games have come to dominate the slot industry.

  • Ronnie Johns: A Life in the Hot Seat

    Following three years as chairman of the Louisiana Gaming Control Board and close to 40 years in public service, Ronnie Johns steps down.