Industry Description

According to the US Census Bureau, casino hotels (NAICS 721120) comprises establishments primarily engaged in providing short-term lodging in hotel facilities with a casino on the premises. The casino on premises includes table wagering games and may include other gambling activities, such as slot machines and sports betting. These establishments generally offer a range of services and amenities, such as food and beverage services, entertainment, valet parking, swimming pools, and conference and convention facilities.  As an industry, it generated $62 billion annually.[1]

 Industry Trends

  1. Many states, now up to 24[2], have started legalizing gambling in order to attract tourism revenue and collect gambling taxes. This means increased opportunity, but also increased competition.
  2. Casinos are looking for new ways to reach the younger demographic. Current casino tactics are more targeted at Baby Boomers, which don’t appeal as well to Millennials.
  3. Changes to legislation now allow games that rely on skill. We will see fewer games that rely on chance and luck, and more games that reward skillful play. 

Key Performance Metrics 

  1. Casino hold percentage (by game), calculated as win divided by drop, (sometimes mistakenly also called the win percentage)
  2. Customer Lifetime Value (CLV)
  3. Promotional allowances as percentage of casino win
  4. Hotel Occupancy rate
  5. Average Daily Room Rate (ADR)
  6. Revenue Per Available Room (RevPAR)
  7. Average Revenue Per User (ARPU)
  8. Percentage room customers by source/type of travel 

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing a casino.  These methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets. This approach is seldom used for a casino being valued as a going concern because the value of a retail business is more closely related to its earnings and cash flow.
  2. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
  4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded casino companies and privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value. 

Benchmark Statistics

The following benchmarking data is based on studies from various casinos:[3]

2016

2015 2014 2013

2012

Operating Profit %

17.3%

18.6% 18.2% 17.5%

11.9%

Net Income before Taxes %

13.6% 13.5% 14.5% 14.8%

12.8%

Sales / Fixed Assets

1.3

1.3 1.3 1.4

1.5

Current Ratio

1.1 1.1 1.1 1.0

1.1

 

Availability of Publically Traded Comparable Companies

For casinos that are publically-traded, the availability of financial data makes it possible to compare a subject company to industry benchmarks and apply industry multiples.  When valuing a casinos, however, it is important to use benchmarks and multiples based on companies that are similar to the subject company.

The top publicly traded U.S. casino companies, ranked by market capitalization, are:[1]

  1. Las Vegas Sands Corp.
  2. MGM Resorts International
  3. Wynn Resorts, Limited
  4. Melco Resorts & Entertainment Limited
  5. Caesars Entertainment Corporation
  6. Eldorado Resorts, Inc.
  7. Boyd Gaming Corporation
  8. Penn National Gaming, Inc.
  9. Monarch Casino & Resort, Inc.
  10. Golden Entertainment, Inc.
  11. Empire Resorts, Inc.
  12. Century Casinos, Inc.
  13. Full House Resorts, Inc.
  14. Nevada Gold & Casinos, Inc.

The trailing twelve month price to earnings ratio of these companies range from negative (not meaningful) to 44.6. The trailing price to sales ratios range from 0.35 to 3.03.[2]

 Availability of Private Purchase Transactions 

In addition to publicly traded casino companies, data regarding privately held companies can provide a useful benchmark when valuing a business. However, these benchmark market multiples are generally too variable to be useful without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject. Specific factors that are unique for each company must be considered.  Additionally, industry economic conditions also vary over time, which can affect casino businesses as investment opportunities.

[1] Finviz.com

[2] Finviz.com

[1] IBISWorld (publically available sections of their report)

[2] American Gaming Association 2017 “State of the States” report

[3] Risk Management Association (RMA), Annual eStatement Studies