Compustat Data Navigator White Paper: Gaming Industry-Specific Data November 2008
Data Navigator: Gaming Industry-Specific Data There are several metrics primary to understanding gaming operations that may be scattered throughout various financial reports. When considering investing in gaming industry stocks it is important to note that critical pieces of data may be scattered throughout a variety of documents, ranging from press releases to filings with the SEC. Specific information pertaining to revenues, promotional allowances, expenses and operating statistics is considered by many analysts to be key to understanding a gaming company s operations. Unfortunately, such information is not always obvious or readily available, but nonetheless may have a profound effect on screening or modeling. To make such items readily available, Compustat now provides an industry-specific gaming data set. It includes companies from the GICS sub-industry Casinos & Gaming (25301010) and is composed of items that quantify gaming revenues, expenses, promotional costs and general size. Items are available on a quarterly (2002 forward) and annual (1999 forward) basis. A complete listing of the data is available on page 8. This paper will walk through each of the items, describing their significance and how they might be used in analysis. A Brief Overview of the Gaming Industry The U.S. gaming industry is largely concentrated in Las Vegas and Atlantic city, though there are numerous regional gaming facilities that include Native American casinos, riverboat casinos, limitedstakes casinos, and racetracks. Las Vegas and Atlantic City represent substantially different markets. Although Atlantic City casinos typically garner higher winnings from players, gaming operations tend to be more profitable in Las Vegas. Las Vegas older casinos have had more time to repay debt, and they don t have the heavy regulatory restrictions (and thus higher costs) imposed on Atlantic City casinos. 1
In recent years there has been a notable movement of U.S. gaming companies overseas, with one of the most promising gaming markets growing in Macau, a region of China just west of Hong Kong. In 2006, Macau surpassed Las Vegas as the largest gaming market by winnings. Larger companies such as Wynn Resorts Ltd., Las Vegas Sands Corp., and MGM Mirage have capitalized on Macau s boom by building casinos there. Other recent trends in gaming include collecting customer data to incentivize low and high rollers, and advancing technology in slot machines to offer more variety in the gaming experience. The gaming industry is closely related to the lodging, or hotel, industry. Apart from the fact that many large casinos are attached to hotels, some of the common characteristics between the two industries include a dependence on legislative regulation, a sizable capital investment, high fixed costs, and a reliance on tourism and leisure travel. For information on the lodging industry data that Compustat provides, see the Data Navigator Whitepaper: Lodging Industry-Specific Data. Revenues and Promotional Allowances Gaming companies generate revenue primarily from casino wins, though a large part of their business can come from hotel rooms, food and beverage, and other sources. Investors will do well to understand these individual revenue sources and Compustat provides data items for each. Investors consider casino and gaming revenues as an important measure of strength of a gaming company s business. Compustat provides Casino & Gaming Revenues (GMREV) on both an annual and quarterly basis. This figure is the aggregate net difference between casino wins and losses, and includes table games, slot machines and sports betting. Investors consider casino and gaming revenues as an important measure of strength of a gaming company s business. A decline in gaming revenues from same-period quarters may signify a loss of leisure travelers, a shift in clients to other casinos, or a particularly unlucky period in terms of casino wins. Casinos with a large number of table games 2
as opposed to slot machines will be more impacted by the luck factor that influences casino revenues (slot machines tend to be a more stable form of revenue see slot machines per square foot on page 5 for one determinant of the stability of revenues). Gaming companies provide several additional revenue categories typically reported on 10-Ks and 10-Qs: Rooms Revenues (GMRMREV), Food & Beverage Revenues (GMFBREV), and Other Gaming-Related Revenues (GMOTHREV). Rooms Revenues (GMRMREV) reflect revenue from hotel operations that many of the larger casinos maintain. Food & Beverage Revenues (GMFBREV) are revenues from restaurants, bars and room service a casino may operate, and Other Gaming-Related Revenues (GMOTHREV) represents all other revenue sources including retail shopping and entertainment ticket sales. Casino, rooms, food and beverage, and other revenues are added together for Total Gaming & Related Revenues (GMTOTREV). As an important note, this figure excludes Promotional Allowances (GMPROM). Casinos frequently give away free rooms and food as an incentive for active players to stay longer and hopefully gamble more. Promotional Allowances is the retail value of these complimentary items, and it is often included in revenue line items for rooms, food and beverage, and other revenues (since these three are given away). * Total Gaming & Related Revenues (GMTOTREV) excludes promotional allowances and therefore represents net revenues. Promotional allowances divided by casino and gaming revenues is a common gauge used to determine the cost of attracting gamers. Promotional Allowances (GMPROM) itself is actually highly regarded by investors as an indicator of how much a company is spending on complimentary items to maintain their business. Promotional allowances divided by casino and gaming revenues (or total revenues) is a common gauge used to determine the percentage of promotional allowances given away in relation to casino revenues. If this percentage is particularly high for a given * The footnote GMPROMF will have a code of PA if a company excludes promotional allowances in rooms, food and beverage, and other revenues. 3
quarter, it may mean the cost of attracting and keeping gamers has risen for the company, unfavorably impacting profitability. Promotional Costs To gain a fuller picture of how much companies are spending on promotional items, Compustat includes four promotional costs figures: Rooms Promotional Costs (GMRMPC), Food & Beverage Promotional Costs (GMFBPC), Other Promotional Costs (GMOTHPC), and Total Promotional Costs (GMTOTPC). These items are different from promotional allowances in that they represent the actual cost a company incurs on complimentary items (not the retail value). These costs can be tracked over periods to watch for rising promotional costs in terms of different revenue sources within the company. Total Promotional Costs (GMTOTPC) divided by casino revenues can similarly be used to determine the overall level of spending on complimentary items. Expenses Gaming expenses and revenues can be used to determine the margin companies are making on various revenue sources. The data items on expenses Casino & Gaming Expenses (GMEXP), Rooms Expenses (GMRMEXP), Food & Beverage Expenses (GMFBEXP), and Other Gaming-Related Expenses (GMOTHEXP) mirror their revenue counterparts, and represent direct operating expenses for the different revenue sources. These can primarily be used to determine the margins companies are making on the various revenue sources. For instance, Casino & Gaming Revenues (GMREV) Casino & Gaming Expenses (GMEXP) Casino & Gaming Revenues (GMREV) yields the net margin companies are making on their casino operations. The same holds for rooms, food and beverage and other expenses. The casino and gaming margin in particular is useful for investors to determine the profitability of a casino s gaming operations as it is their driving source of income. 4
Company Size Similar to lodging companies, casino operators have three ways to grow: raising revenues at existing casinos, opening new casinos, or making acquisitions. There are several benefits to growth by expansion. Companies generally realize economies of scale in overhead expenses. They are also able to leverage their large operating budgets to purchase improvements such as new gaming technology, refurbished rooms, or increased marketing. Larger gaming companies can have a distinct competitive advantage over smaller companies in this way. Company size figures can be used to determine expansion over time, and are also useful in a few valuable ratios. Increases in company size can be considered through several casino-specific figures that Compustat provides: Casino Square Footage (GMSQF), Guestrooms & Suites (GMROOMS), Slot Machines (GMSLOTS), and Gaming Tables (GMTABLES). Each of these is way of looking at expansion over time. Increases in square footage or gaming tables show the acquisition or building of new sites (though new sites may not significantly impact revenues in the immediate term). Investors look for gaming companies to show positive growth in each of these measures over time. Company size figures can also be used in a few valuable ratios. Casino & Gaming Revenues (GMREV) divided by Casino Square Footage (GMSQF) gives casino revenues per square foot. Because of the large overhead involved in running a casino, this is used as a measure of efficiency how much revenue is being generated per square foot on the casino floor. This figure is useful for comparing companies, particularly peers that cater to the same type of customer. Slot Machines (GMSLOTS) divided by Casino Square Footage (GMSQF) yields slot machines per square foot. This figure is useful in determining what the company s focus is in terms of revenue whether they focus on slot machines as opposed to table games. A high count of slot machines per square foot 5
represents a more stable form of revenue for a company, and also helps indicate the kind of customer the company markets to. Case Study Let s take a look at an example of some gaming data from Compustat. The following table compares second quarter data from 2007 and 2008 for seven large market cap gaming companies that focus on casino operations. (Note: the second quarter ends in June for all companies except Isle of Capri, which ends its second quarter in July.) Considering Casino & Gaming Revenues, we note several companies managed to raise revenues over the year significantly Las Vegas Sands, Wynn Resorts, Pinnacle Entertainment and Ameristar Casinos. Out of these four, Excluded from the screening are several large gaming companies whose primary line of business is selling slot machines and gaming-related software. There are a handful of such gaming companies within the Casino & Gaming (25301010) GICS code, and these companies may have N/A (Not Available data code) for data items such as Casino Revenues, etc. 6
Ameristar and Las Vegas Sands had a notable increase in Promotional Allowances, with Ameristar seeing a 4.8% increase in Promotional Allowances over Casino & Gaming Revenues. This increase in promotional allowances is also reflected in Casino & Gaming margins, with both Las Vegas Sands and Ameristar seeing negative drops in margins of -5.3% and -3.6% respectively. While Wynn Resorts saw promotional allowances slightly lower, they also saw their margin drop, as did Pinnacle. Dropping margins and rising promotional allowances may well be due to the general economic downturn. One company that appears relatively stable in its year-to-year change is Isle of Capri. Isle of Capri saw slightly higher revenues, slightly lower promotional allowances, and slightly higher margins. Summary The gaming data is quite valuable for screening companies, and could be used to include gaming companies in a comprehensive quantitative model. The data has been selected according to its significance the items are widely meaningful within the industry, and companies report them in 10Ks, 10Qs, newswires or website data sources. Compustat s data has been further standardized to remove discrepancies in the way companies report items; as a result, the data is immediately comparable across companies and time, and is a reliable indicator of trends in the industry. We hope that this guide has served as a primer to understanding the casino & gaming industry and how Compustat data might be used in analysis. For in-depth information on analyzing gaming companies, see Standard & Poor s Industry Survey: Lodging and Gaming. Industry surveys are available with a subscription to Standard & Poors Market Insight. 7
Gaming Industry-Specific Data Items Mnemonic Data Item Name Units Revenues and Promotional Allowances GMREV (Q) Casino & Gaming Revenues Millions GMRMREV (Q) Rooms Revenues Millions GMFBREV (Q) Food & Beverage Revenues Millions GMOTHREV (Q) Other Gaming-Related Revenues Millions GMPROM (Q) Promotional Allowances Millions GMTOTREV (Q) Total Gaming & Related Revenues Millions Promotional Costs GMRMPC Rooms Promotional Costs Millions GMFBPC Food & Beverage Promotional Costs Millions GMOTHPC Other Promotional Costs Millions GMTOTPC Total Promotional Costs Millions Expenses GMEXP (Q) Casino & Gaming Expenses Millions GMRMEXP (Q) Rooms Expenses Millions GMFBEXP (Q) Food & Beverage Expenses Millions GMOTHEXP (Q) Other Gaming-Related Expenses Millions Company Size GMSQF Casino Square Footage Actual GMROOMS Guestrooms & Suites Actual GMSLOTS Slot Machines Actual GMTABLES Gaming Tables Actual (Q) next to mnemonic signifies the item is available quarterly as well as annually. 8
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