Casinos getting down to business

May 23, 2006 12:37 AM

Flying into Las Vegas on the Greyhound bus of the sky, Southwest, my seatmate decided to commence the patter. "Are you going to gamble?"

I replied, "No, I’m going for an equity analyst conference."

Although I thought he would lose interest and maybe daydream about someday being a guest on the Jerry Springer Show, Joe Sweatsock queried further, "What’s that, some kind of secret fraternal organization”¦like the Masons?"

"No, it is a meeting where gaming firms announce their annual plans and ”˜numbers’ so that financial institutions on Wall Street can gauge whether or not a specific casino or casino company is worth investing in."

I thought I was pretty clear and concise, but like Tom Cruise, the guy would not shut his pie-hole.

"Dang mister, why would a casino have to worry about money, they basically print the stuff, don’t they?"

I wondered whether a tornado could level a person even if he isn’t in his trailer, and prayed for a change of cabin pressure.

Unfortunately, Joe Sweatsock, who actually decided to sport flip-flops on the plane, represents a surprising number of people’s belief that casinos are basically money machines. They are not!

In Las Vegas inside the building that sits on $18,000,000 an acre land otherwise known as the Tropicana, there is a museum celebrating the history of casinos in Nevada. Like the punch in the gut feeling a musician must suffer when spying his artistic labor of love in the 2-for-99¡ moldy oldies bargain bin, this archive of casinos has a case dedicated to properties that opened and closed in a week or so and those that, although all of the collateral was produced (e.g., stationery, key fobs, matchbooks, et cetera), never opened.

At the Jefferies conference, which was held May 8-10 at Wynn Las Vegas, several companies active in Colorado made presentations, including Ameristar, Isle of Capri Casinos, Inc, and Nevada Gold & Casinos, Inc.

During the dog and pony shows, the financials were shared. After examining the income statements, balance sheets, and records of cash flow, it is evident just how challenging operating a casino in a regional, limited stakes market can be.

On the plus side, these particular operators are the relative winners since they have been able to remain open. Of course, these companies also hedge their risk by maintaining diversified holdings.

According to Wall Street estimates, the publicly traded companies in Black Hawk have estimated adjusted profit margins ranging from approximately 11.7% at Penn Gaming’s Bullwhakers up to 34% with Riviera Black Hawk.

Ameristar’s projected EBIDTA margin for this fiscal year is a reasonable 16.6%. For comparison’s sake, the average profit margin for Las Vegas casinos is a healthy 29%.

Steven Gart, Senior Investment Analyst at Nickel Capital, contends concerning the viability of a casino that, "Casinos win or lose by the battle of the operating leverage. So many costs are fixed from electricity to entertainment. If you can drive the masses in, you have the ability to enjoy economies of scale. Every extra body through the doors drives incremental operating profit. If the masses don’t come, it’s tough."

Taking stock of development in Black Hawk and Central City on a recent walk-through, I found that two major projects were well underway. In Central City, The Celebrations Casino & Hotel by Century Casinos is scheduled to open in July and Crook’s, a 24 hour restaurant is deep into renovation and construction. It was also a pleasant surprise to see another historic hotel re-opening its rooms and a day spa/café being developed in the heart of Central City. Diversification of the lodging and gaming-alternative outlets can do nothing but help the market grow.

While new development continues, approximately one-third of the independent/boutique casinos that once operated remain ghostly vacant.

As examined in previous articles, the smaller and/or independent properties have a tough time making a go of gaming. The trend of larger casino companies with diversified holdings acting as operators is becoming the norm.

Non-gaming facilities, such as Crook’s, benefit from a revived movement toward public/private partnerships. As the Colorado gaming markets mature, it is inspirational to witness a new phase of development and improvement in a setting that many felt had become stagnant.