When I first started researching the topic of gambling, I wanted to find out what were the top casino games. In the US, we had two: Blackjack and Slots. They are both incredibly popular with the general public. In Europe, they dominate. So then: What were they?
The United States, as you probably know, is probably best known for Blackjack and the casino slot machines that surround it. That’s why there’s so much news about online gambling and how it’s taking over. But in Europe, things are quite different. Here, casinos are much smaller, and online casinos have almost nothing to do with the larger casinos, or the larger general population.
So then: what are these casinos offering? Well, first of all, they’re no longer just gambling facilities. In the US, there are dozens of small “micro” casinos scattered around states. And in many of them, like Macau and Las Vegas, there are big-name casinos. But there are also some very small “specialty” casinos scattered around Europe. And, they’re doing very well.
So the question becomes: what are these “micro” casinos doing that makes them so profitable? The answer, of course, is simple: gambling. In Europe, the top casinos all have a very basic function. They offer high-quality gaming, and they have specific clientele that primarily gambles in those slots and video poker machines.
The same is true of the biggest Wynn resorts. In many of the European cities, including London, Paris, Lisbon, and Amsterdam, you’ll find the same concrete casinos that you’d find in the larger US casinos. The big difference is that they’re surrounded by lush, attractive places to eat, shop, and (of course) gamble.
If you take a look at the business side of the gambling industry, what you’ll find is the same thing. Top casino stocks are usually made up of properties (like hotels, casinos, and restaurants). They’re also made up of debt. As in the case of Wynn resorts, they use their debt to finance growth. The debt gives them cash flow during times when they don’t make money on the gambling floor, but it can get them into heavy debt during times when they do.
Now here’s the thing. On paper, the two kinds of gambling property (hotels, casinos, etc.) look really strong. In terms of liquidity and return on equity, they already priced out most investors. They’ve got mountains of cash on hand, and a strong recovery in the gambling industry means that even people who’ve lost their jobs can’t get any cash out of their accounts.
So, what should an investor look for in a company like this? First, you want to look for companies that have strong management teams. In the gambling industry, management is everything. If a manager doesn’t know what he’s doing, and the board doesn’t understand how to run the business, you could be watching a company going bankrupt (or being taken over). Also, you want to find a company that has a strong profit margin, a high dividend, and a management team that seem to have strong control over the day to day operations.
That leaves us with the question of what makes a top casino stock so highly vulnerable to a liquidity crisis. The first thing that investors watch is the balance sheet. If the balance sheet is weak, it’s almost as if the company is gambling and hoping for a big payoff. Casino gambling is high risk, with large odds of loss. The casino may be betting large amounts of money on a very narrow scenario, so the risk of losing more money than it’s put up is extremely high.
That leads investors to look at debt and liquidity ratios. The higher the debt-to-equity ratio, the more highly leveraged a given company is. It’s a sign that they may not be able to raise enough cash through dividends to keep the lights on in the casino. The higher the ratio, the more volatile the shares are because of the possibility of a liquidity crisis.
So looking for companies that appear to have high debt and/or lower EBIT (earnings per share) in the last six months, we can start to eliminate casino stocks that have a lot of these characteristics. We’re looking for companies that have strong financials, and strong earnings growth, especially since casino investing is high risk. Look for a stock that has the following attributes: stable management, decent earnings growth, and a good dividend.
If you want to invest in the top casinos, the safest place to do it is now. They’re still expensive, but there’s a lot less risk. So go ahead and play the “crisis” games, just don’t play them when the casinos are playing theirs. Please consider all this.