Gaming is a relatively small and misunderstood industry. That makes it potentially lucrative for investors armed with knowledge.
It possesses many of the traits that legendary investors Peter Lynch and Warren Buffett seek. It:
- Is riding a demographic wave
- Has significant barriers to entry
- Is easy to understand
- Is tangible
- Has visible revenue and earnings
- Is highly regulated providing integrity in its numbers
- Is not followed closely by Wall Street, thus is often mispriced
- Is part of human nature and will be around forever
We’ll discuss each of these points, but for starters, let’s describe the industry.
Gaming is a world wide industry with a concentration in the United States. It breaks into two camps—casino operators and their suppliers.
The casino operators in North America are companies such as Harrahs Entertainment and Ameristar Casinos, and the proliferating Native American casinos often managed by commercial operators. The suppliers are principally slot machine makers and software companies that, in turn, supply them. Examples are International Game Technology and Shuffle Master.
There are variations on these themes—race tracks, lottery suppliers, makers of playing cards, etc. But when people talk about gaming, they tend to focus on casino companies and slot makers.
All of these companies and industry segments are covered in Fantini’s Gaming Report and analyzed in Frank Fantini’s Gaming Investment Research, so here we will focus on industry dynamics:
The Demographic Wave
If demographics are the future, gaming will do very well. America is becoming older and more affluent. Persons 50 and older with discretionary income are the best casino customers. The world is also becoming more affluent. International visitation to Las Vegas and other U.S. resorts will continue to grow, and other countries such as Macau are now developing their own gaming resorts. In short, gaming is a growth industry.
Barriers to Entry
Just the process getting a license constrains competition. It is a long, intrusive and expensive process. In the United States alone, there are more than 100 regulatory agencies that require separate licensing applications and investigations. It is generally agreed that many companies and executives stay away from gaming because they do not want to bare their financial—and personal—selves to the world.In addition, many jurisdictions limit the number of casino licenses, thus creating an oligopoly.
In addition, many jurisdictions limit the number of casino licenses, thus creating an oligopoly.
Easy to Understand
Gaming is a simple business. People put money in slot machines or at table games and, in aggregate, receive a lesser amount in return. If a slot machine is programmed to pay back 92 cents on the dollar, it does. As the old adage goes, the house always wins. Plus, it is easy to walk through a casino and gauge its volume of activity, type of customer, physical condition or to walk through the same casino and see how many people are playing whose slot machines.
It is Tangible
Those people sitting at the slot machines are handing hard cash over to the casino. The slot machines are real, physical products. The business is housed in bricks and mortar. In short, this is a real business, not a bewildering concoction of derivatives and swaps.
Visible Revenue and Earnings
In many states, casinos must report their revenue monthly, in some cases down to how much was won on 5-cent slot machines and 25-cent machines, or from blackjack or Let It Ride. No other industry releases so much financial information so often.
With all the watchdog agencies and frequent reporting, quarterly earnings statements are probably more indicative of a company’s financial condition than just about any industry anywhere. No Enrons here.
Misunderstood and Mispriced
Perhaps because gaming is a small industry that carries a stigma for some people, it does not have as much analyst coverage as other industries. So, despite its simplicity and visibility, it is often misunderstood and mispriced. That presents a golden opportunity for informed investors.
Peter Lynch has said that the best investments are often in things that can be addictive—alcohol, tobacco, chocolate. Gambling is in the same category. It is human nature to take a chance. Risk built America. People love to have fun. And modern casinos are pure entertainment centers with fine restaurants, upscale stores, the best production shows, with celebrities on stage and on the gaming floor.
Fun—and gambling—will never become obsolete.