What are we looking for?
Winning investments in the casino industry.
The screen
Many incredibly affluent (some very famous) American families set forth on their road to riches by starting alcohol businesses during Prohibition. Almost 100 years later, many entrepreneurs are hoping to replicate their success by building marijuana enterprises while cannabis is still illegal in most U.S. states. A similar strategy exists in the gambling industry, which is only legal – statewide – in two states, Louisiana and Nevada.
In past elections, gambling was a very controversial issue, unpopular among socially conservative Republicans. The negative sentiment toward the industry appears to be fading though, evidenced by a Republican former casino owner set to take over as U.S. president.
Casinos are also gaining favour in mainstream institutional investing. Billionaire activist investor Carl Icahn owns several casinos, the British Medical Association's pension invests in a fund that owns 52 bingo halls, while other European pensions are invested in the Gibraltar-based online casino Lottoland. By applying conventional investment metrics to the gambling industry retail investors can also capitalize on this trend.
- First, to avoid companies that are potentially overvalued, we look for a P/E ratio of less than 20. This eliminates the largest casino operators such as Las Vegas Sands and MGM;
- Next, to avoid the downside risks associated with investing in smaller microcap companies we include only companies with a market capitalization greater than $150-million (U.S.);
Finally, we look at these companies' free cash flow. Casinos, for obvious reasons, are cash-intensive businesses and need positive free cash flow to sustain operations in the long run. We exclude any company with negative free cash flow.
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What did we find?
The screen yields nine companies, two of which are Canadian. Alberta-based Gamehost Inc. pays a monthly dividend and has operations in Calgary and Grande Prairie, along with the Boomtown Casino in Fort McMurray. The much larger Great Canadian Gaming Corp. is also a potentially promising investment, with both casino and racetrack operations across Canada and Washington State.
South of the border, Red Rock Resorts Inc. – the largest company in the screen – began paying a quarterly dividend in August. Their diverse portfolio (slots, tables, convention venues, live entertainment, bowling, movie screens) is centred in the Las Vegas area, but also has operations in California and Michigan. Tropicana Entertainment Inc. is also an interesting play with casino resorts in Atlantic City, N.J., the Southeast United States and Aruba.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.