Online gambling has been legal and regulated in England and other parts of the world for years. Some investors think the U.S. will eventually have a fully regulated market like England, but right now it is just on a state by state basis. Nevada and New Jersey both have regulated online poker, but more people are watching New Jersey as it has a higher population and more gambling websites. Also, New Jersey allows other casino games online, but Nevada just allows poker. Many publicly traded companies are taking part in the New Jersey market, and investors have opportunities to get involved. However, there is a lot of risk and speculation in this space.
1. It is hard to make a pure play on the land-based casino/brand side. Many of these companies are highly leveraged and dependent on real estate.
2. It is hard to place a long term value on the online platform companies. The land-based casino companies need their technology in the short run but there are a lot of question marks for long term partnerships.
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- MGM 15-Year Financial Data
- The intrinsic value of MGM
- Peter Lynch Chart of MGM
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The NJ Division of Gaming Enforcement lists the authorized sites for internet gaming:
At the time of this writing, Borgata and Caesars have the most online gamblers in New Jersey. My New Jersey Online Poker Update article has more details on why this trend should continue.
The Borgata is the biggest Atlantic City casino in terms of revenue. It is owned 50-50 by MGM and Boyd Gaming (NYSE:BYD) and operated 100% by Boyd Gaming.
The 2012 10-K shows net loss of $1.77 billion USD in 2012, net income of $3.11 billion USD in 2011 and net loss of $1.44 billion USD in 2010. It also shows long term debt of $13.6 billion USD.
Investors looking at MGM should be mindful about impairment charges the company has taken on Borgata in 2010, 2011 and 2012. Will impairments like these continue in 2013 and beyond?
MGM has a lot of brands that could be leveraged if online poker becomes a reality on the federal level in the U.S. Specifically, Bellagio is well known for high stakes games.
Boyd Gaming (NYSE:BYD)
Again, Boyd Gaming operates the Borgata and has 50% ownership.
The 2012 10-K shows net loss of $908.9 million USD in 2012, $3.9 million USD in 2011 and net income of $10.3 million USD in 2010. It also shows long term debt of $4.8 billion USD.
Boyd Gaming talks about its agreement with bwinparty.com in its 2012 10-K filing:
On October 31, 2011, we announced that we had entered into an agreement with bwin.party digital entertainment plc, the world's largest publicly traded online gaming company. Should Congress legalize online poker in the United States, and subject to regulatory approvals, we would acquire a 10% stake in a new company that would offer online poker to United States-based players under bwin.party's brands, including PartyPoker. Separately, we entered into a 15-year agreement to use bwin.party's technology platform and associated services to offer online poker to United States players under a brand we develop, assuming Congress passes enabling legislation.
Boyd Gaming investors need to weigh the fact that we’re only talking about a 10% stake in the new company.
The company mentions other U.S. markets like California and Florida. Their agreement to develop and manage a gaming property near Sacramento could lead to increased revenue, especially if California eventually regulates online gambling in a manner similar to New Jersey.
Caesars owns four casinos in Atlantic City and two of them are involved with Internet gambling at the time of this writing.
The 2012 10-K shows net losses of $1.498 billion USD in 2012, $687.6 million USD in 2011 and $831.1 million USD in 2010. It also shows long term debt of $20.53 billion.
Caesars arguably has the most valuable gambling brands in the world. The Caesars, WSOP and Harrah’s brands have great potential if regulated online gambling expands in the U.S.
Caesars Acquisition (NASDAQ:CACQ)
The Nov. 18, 2013, Caesars press release talks about Caesars Acquisition Company known as CAC and having ticker symbol CACQ:
CAC was formed to make an equity investment in Growth Partners, a joint venture between CAC and Caesars, the world's most diversified casino entertainment provider and most geographically diverse U.S. casino-entertainment company. Growth Partners is a casino asset and entertainment company focused on acquiring and developing a portfolio of high-growth operating assets and equity and debt investments in the gaming and interactive entertainment industry. Through its two businesses—Interactive Entertainment and Casino Properties and Developments—Growth Partners will focus on acquiring or developing assets with strong value creation potential and leveraging interactive technology with well-known online and mobile game portfolio and leading brands. Assets include Caesars Interactive Entertainment ["CIE"] (with its social and mobile games, the World Series of Poker and regulated online real money gaming businesses), Planet Hollywood (located in Las Vegas, Nevada), and Horseshoe Baltimore (currently being developed by a joint venture).
The 2013 Q3 10-Q explains that CAC's only material asset is Caesars Growth Partners otherwise knows as CGP. The historical statements of businesses and assets to be contributed to or acquired by CGP are shown to investors. These statements show net income of $86.1 million USD for the first nine months of 2013 and $90.2 million USD for the first nine months of 2012. The long term debt shown is $690.4 million USD.
Caesars Growth Partners breaks out revenue in two different segments:
Interactive Entertainment: $221.5 million USD YTD through Q3.
Casino Properties and Developments: $249.1 million USD YTD through Q3.
The Interactive Entertainment segment is further broken down into two lines:
Social and mobile games: $212.0 million USD through Q3.
WSOP and online real money gaming: $9.5 million USD through Q3.
We then see the net income of the segments:
Interactive Entertainment: $0.4 million USD through Q3.
Casino Properties and Developments: $2.5 million USD through Q3.
At this point one might ask how we got to the 86.1 million USD net income figure mentioned earlier. Most of this comes from the "Other" part of the statements. Specifically, "Other" has $128.0 million USD through the third quarter in "interest income - related party" and -$44.8 million USD through third quarter in "benefit from/(provision for) income taxes."
California enters the picture in the "Other income, net explanation." Specifically, it is noted that $0.8 million USD through third quarter year-to-date income were received from a third party with a joint agreement to support a California online poker law.
bwinparty.com is the online platform partner with Borgata.
The 2012 annual report shows net losses of $64.7 million EUR in 2012 and $432 million EUR in 2011.
The half yearly results through June 30, 2013, show revenue declined in the first six months of 2013 compared to the first six months of 2012. Casino & Games fell from 139.7 million euros to 110.8 million euros, while Poker fell from 96.4 million euros to 62.3 million euros. It remains to be seen if New Jersey and other markets can help the company get its revenue moving in the right direction again.
The company seems cautiously optimistic about other states like California in its 2012 annual report. It is significant that it mentions California Senator Rod Wright reintroducing his online poker bill, SB51. Some estimates say the online California market could be as big as $1 billion USD gross gaming revenue per year. If this comes to fruition then many companies have an opportunity to increase revenue dramatically.
The annual report notes that the partypoker brand was very strong in the U.S. before leaving the market in 2006. At one point the brand had an estimated 47% market share. It is using this brand awareness to build up the player base in New Jersey.
888 is the platform partner with Caesars on the Bally’s Internet gaming permit.
Its 2012 annual report shows net profit of $35.4 million USD in 2012 and $1.9 million USD in 2011. Unlike bwin.party, its 2013 half yearly report shows revenue moving in the right direction. Poker revenue increased from $41.3 million USD for the first six months of 2012 to $46.9 million USD for the first six months of 2013. Casino revenue increased from $83.1 million USD for the first six months of 2012 to $94.1 million USD for the first six months of 2013.
At the time if this writing its P/E ratio is just under 20 meaning the company is valued at almost 20 times the 2012 net profits. If the net profit continues to grow then this is reasonable, but there are risks that the 888 brand might not do as well in the future as some of the brands tied to land-based casinos.
The annual report talks about the fact that the company is doing well as more markets become regulated. In fact, its poker revenue since regulation is more than twice what it was before regulation.
Amaya is the platform partner with Caesars.
The 2012 annual report shows net loss of $7.1 million CAD in 2012 and $1.9 million CAD in 2011. The balance sheet shows long term debt of $99.4 million CAD.
Buying companies like CryptoLogic and Ongame, Amaya has made some expensive acquisitions. As such, it is more highly leveraged than some of the other online platform companies.
Bally Technologies (BYI)
Bally Technologies is the platform for Golden Nugget.
Per the 2013 10-K, its fiscal year ends June 30. Its income statement shows net income of $141.4 million USD in 2013, $101.1 million USD in 2012 and $98.3 million USD in 2011. Long term debt is $580 million USD.
The company announced that in July 2013 it agreed to acquire SHFL for approximately $1.3 billion USD. Large acquisitions like this carry risks to investors. At the time of this writing, the P/E was just over 20 which is acceptable if net income continues to grow and the company makes good capital allocation decisions.
Betfair is the platform for Trump Plaza.
Unlike other companies in this space, the fiscal year for Betfair ends April 30. The 2013 annual report shows net loss of $66.3 million GBP in 2013 and net income of $34 million GBP in 2012.
The company had $82.4 million GBP of impairments in 2013.
MGM, Boyd Gaming and Caesars own land-based casinos and they are highly leveraged. Investors need to look at their long term debt and determine if they are comfortable owning companies with that much leverage. For the most part, the online platform companies are not highly leveraged (there are exceptions like Amaya), but arguments can be made that their brands are not as valuable as the brands of land-based casinos in the long run.
Business Relationship Disclosure
As co-founder of flopturnriver.com, I've been doing affiliate marketing for some of these companies since 2004. For example, we've been in the http://www.bwinpartypartners.com affiliate program for years promoting bwin and PartyPoker in England and other non-US markets. Also, we began marketing Caesars in New Jersey recently.
I am long CACQ. Any material in this article should not be relied on as a formal investment recommendation.