Casino ROIC

Talked about CZR for an interview and the guy asked me why casinos have historically had low ROIC. My guess is that they require a lot of investment and are only allowed in certain places which leads to suffocating competition. Interviewer just told me was wrong and didn’t elaborate. Can someone explain?

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Just speculating but iirc as gamblers get smarter, the house odds are becoming less profitable so that may have something to do it with. Plus id imagine competition from online betting, high opex, political risk from being a vice all contribute. Not too familiar tho so far from certain

 

Expanding a little - the only game where gamblers have gotten “smarter” is BJ, where more people Re familiar with / play basic strategy due to the proliferation of the internet. Also people are more conscious of rake in the poker room. That being said, that’s totally immaterial. Don’t believe idiots like Mikey Manse - no one is beating the house

 

Based on the most helpful WSO content, here are some insights into why casinos have historically had low ROIC:

  1. High Capital Expenditure:

    • Casinos require significant upfront investment in infrastructure, gaming equipment, and amenities. This high capital expenditure can lead to lower returns on invested capital, especially if the revenue generated does not proportionately exceed these costs.
  2. Cyclical Nature of the Business:

    • The gaming and leisure industry is highly cyclical. During economic downturns, discretionary spending on gaming and leisure activities tends to decrease significantly. This volatility can impact the profitability and, consequently, the ROIC of casinos.
  3. Regulatory Constraints:

    • Casinos are heavily regulated and are only allowed to operate in specific jurisdictions. These regulatory constraints can limit market expansion and growth opportunities, thereby affecting the overall return on invested capital.
  4. Intense Competition:

    • In regions where casinos are permitted, the competition can be intense. This competition can drive down margins and profitability, further contributing to lower ROIC.
  5. Maintenance and Upkeep Costs:

    • Casinos require continuous maintenance and periodic upgrades to remain attractive to customers. These ongoing costs can eat into profits and reduce the overall return on invested capital.
  6. Market Saturation:

    • In some areas, the market for casinos can become saturated, leading to diminished returns as the customer base is divided among multiple operators.

These factors collectively contribute to the historically low ROIC observed in the casino industry.

Sources: ROIC in LBO, Understanding how to specifically calculate ROIC, DCF Modeling Course ~ Pre-training text.pdf, The Asymmetric Risk Profile: Preparing for the Hedge Fund Interview, The Asymmetric Risk Profile: Preparing for the Hedge Fund Interview

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

I've never looked at a casino's financials before, but I'll take a guess anyway.

They're asset heavy businesses. They have large real state/hotel and entertainment operations to attract customers. These, while profitable, will be less than profitable than the pure gaming operations.

Casinos will also have large intangibles through consolidation and trademarks and gaming licenses that will be capitalized.

 

Also speculating but Casino's are asset heavy, have pretty high CapEx, and OpEx, and have to pay insanely high municipality taxes on their post-payout revenues.

 
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