MGM - Full House Resorts: The Battle Versus Online Competition

2023-07-17 16:29:02 ET

Summary

• Full House Resorts, a casino and hospitality company, faces challenges due to inconsistent revenue growth, negative net profit margin, and increased operating expenses from the opening of a new property, The Temporary.
• The rise of online casinos poses a threat to the demand for offline facilities, impacting the company's future revenue potential.
• Compared to similar companies like Caesars Entertainment, MGM Resorts International, and Penn National Gaming, Full House Resorts' valuation metrics and financial performance are less favorable.

Thesis

Full House Resorts ( FLL ) operates within the casino and hospitality industry, owning, leasing, managing, and investing in casinos and related facilities. However, the company faces challenges with inconsistent revenue growth rates, a negative net profit margin, and increased operating expenses due to the opening of The Temporary property. When compared to other similar companies, Full House Resorts' valuation metrics and financial performance aren't cheap. I am waiting for a more optimistic buying opportunity.

What does Full House Resorts do?

Full House Resorts is involved in various aspects of the casino and hospitality industry. The company owns, leases, manages, and invests in casinos and related facilities for entertainment and hospitality purposes.

Full House Resorts generates revenue through various sources, including gaming activities, hotel accommodations, food and beverage services, and other onsite operations. They also benefit from permitted sports wagering sites in Colorado, Indiana, and Illinois, which are operated by third-party companies under their own brands, with Full House Resorts receiving a percentage of the revenues generated.

The company's properties are located in different states, including Mississippi, Colorado, Indiana, Nevada, and Illinois. Each property offers various amenities such as hotel accommodations, dining options, and recreational facilities. Full House Resorts aims to attract both local residents and tourists by providing a range of gaming options, high-quality customer service, and loyalty programs. They also assess growth opportunities, including the development of new properties and the acquisition of existing ones, to expand their operations.

Market

I think a large part of the success of the market that Full House Resorts operates in, is dependent on the offline casino vs online casino situation. More success for online casinos at the expense of offline casinos will lead to lower demand for offline casino facilities, therefore slowing down future revenue growth.

Casino owners are now faced with a crucial decision - whether to invest in a traditional brick-and-mortar casino or embrace the digital era with an online casino platform. Both options come with unique advantages and disadvantages that can make or break a business, especially for those interested in starting a gambling venture.

Let's delve into the pros of online casinos. First and foremost, their increased accessibility has revolutionized the gambling industry. Players can enjoy their favorite games from anywhere in the world as long as they have an internet connection, eliminating the need to travel to a physical casino. The 24/7 availability of online casinos has attracted a diverse pool of players, making it a popular alternative to traditional casinos.

Online casinos also boast lower operating costs, as they don't require significant investments in real estate, equipment, and staffing. With fewer regulatory and licensing requirements, they can offer better payouts to customers, leading to higher revenue potential.

Another major advantage is the wider range of games online casinos offer. The absence of space limitations allows them to add new games regularly, providing players with a steady stream of fresh content. Additionally, they often provide free versions of games for players to try out risk-free.

Moreover, online casinos have significantly improved the user experience by offering intuitive interfaces, high-quality graphics, sound effects, and animations. Real-time interaction with other players and dealers through live chat and mobile compatibility for on-the-go gaming have further enhanced the gaming environment.

While online casinos have many benefits, there are some challenges to consider. Security concerns arise from the risk of cyberattacks, fraud, and money laundering, requiring a focus on safety measures. Adhering to different laws and regulations in each jurisdiction can be a hurdle for online casinos, making compliance with licensing requirements crucial.

Furthermore, online casinos are dependent on technology, which can lead to glitches or technical issues affecting gameplay, security, and player experience.

On the other hand, offline casinos, also known as brick-and-mortar casinos, offer a tangible and social atmosphere that engages players' senses. The sights and sounds of a lively casino floor, interaction with real dealers and fellow players, and various amenities create a unique and memorable experience.

An established reputation and trust give offline casinos an edge, instilling confidence and peace of mind among players. They invest significantly in security measures to ensure the safety of players and staff, using security cameras, trained personnel, and advanced technology.

However, operating costs are higher for offline casinos due to maintaining physical establishments and employing personnel like dealers, pit bosses, and security staff. Limited accessibility, stricter regulations, and declining revenue potential due to online competition are other challenges they face.

The choice between online and offline casinos depends on the business model, target audience, and location. Both have significant revenue potential, but online casinos are experiencing more rapid growth and technological advancements are expected to shape the future of both types of casinos.

In conclusion, both online and offline casinos have their merits and drawbacks, and the decision lies in understanding their unique attributes and aligning them with business goals and customer preferences. Therefore, I still believe offline casinos won't completely disappear but will be challenged greatly by online casinos.

Competition

In the highly competitive world of casino hotels, the battle for customers' attention and gambling revenue is fierce. These establishments face numerous challenges as they strive to outperform their rivals and gain a larger share of the market.

Ultimately, staying competitive in the casino hotel industry requires a keen understanding of customer preferences, ongoing monitoring of market trends, and the ability to adapt and innovate. The battle for customers' patronage is continuous, and each casino hotel strives to differentiate itself through gaming offerings, amenities, service quality, marketing, and the overall experience it provides to guests.

There are quite some publicly listed competitors, so I will list 5 of them:

• MGM Resorts International ( MGM )
• Las Vegas Sands Corp. ( LVS )
• Wynn Resorts, Limited ( WYNN )
• Caesars Entertainment, Inc. ( CZR )
• PENN Entertainment, Inc. ( PENN )

Performance

Source: Seeking Alpha (Retrieved on 07-15-2023)

While the most recent quarter was a successful quarter, TTM (trailing twelve months) and 3-year growth rates aren’t great, and the net profit margin isn't great either. I delved deeper into the numbers.

According to the most recent Full House Resorts earnings call transcript, several factors contributed to the growth in revenue during Q1. One significant factor was the opening of The Temporary property in Illinois. Despite being open for only one and a half months, it generated $3.6 million of EBITDA with 34% margins ( source: earnings call). The company expects further improvements as they expand amenities and offerings at the property. This looks rather promising.

Another factor was the expansion of table game operations. According to the earnings call, the company was permitted to open tables at an earlier time and increase the maximum table bets, resulting in increased gaming revenue. The removal of table limits was also mentioned as a future plan.

The Temporary property achieved several records in April, as stated in the earnings call. It had its best gaming day so far, grossing $0.5 million in daily gaming revenue. It also achieved the best and second-best weekly table games revenue for the month. These milestones indicate the property's positive momentum and growth potential.

Marketing efforts played a crucial role in attracting customers to The Temporary property. The earnings call mentioned mass advertising through TV ads, billboards, and other channels to promote the property. Building a customer database was another focus, with over 25,000 people currently on the list. This database will enable more targeted and efficient marketing campaigns in the future.

Operational improvements were acknowledged based on the experiences gained from operating The Temporary property. The appearance of the property during the day was a concern, but efforts were made to address this issue and enhance the overall aesthetics. Collaborating with experienced architects was also mentioned to optimize the design of the permanent property, Chamonix, based on lessons learned.

Chamonix, the permanent property, is scheduled to open on December 26, according to the earnings call. The company expressed confidence in the opening date, stating that there are no anticipated regulatory issues. Chamonix could contribute to revenue growth and profitability, by offering improved amenities and additional parking.

These numbers look decent. However, in the Q4 2022 quarterly report , it was stated that:

Consolidated total revenues decreased by $5.8 million and $9.7 million for the respective three- and nine-month periods ended September 30, 2022, primarily due to the absence of government stimulus programs of the same scale as in the prior-year periods; the competitive launch of online sports wagering in nearby Louisiana, which adversely affected our in-house sportsbook in Mississippi; and construction disruptions at Bronco Billy’s to advance the completion of our Chamonix project.

Despite the success of the opening of the Temporary, these factors (and especially the mention of online sports wagering) make me worry about the long-term revenue and profit outlook.

Furthermore, the opening of The Temporary comes with a higher cost, which I derive from the same quarterly report:

Consolidated operating expenses increased by $2.9 million and $6.4 million for the respective three and nine months ended September 30, 2022, primarily due to preopening costs for The Temporary (expected to open within the next three months) and for Chamonix (expected to open in mid-2023)

This adds pressure to the negative net income margin.

Valuation and Performance Comparison

Source: Seeking Alpha (Retrieved on 07-15-2023)

Compared to similar companies, I am not happy with how things are looking for Full House Resorts. MGM Resorts International and Penn National Gaming have very nice P/E ratios, whilst having lower P/S ratios than Full House Resorts. Caesars Entertainment has a net profit margin that is much closer to 0, whilst also having a lower P/S ratio and a very high annual sales growth rate (3Y). Overall, valuation-wise, there are better options to pick from.

Conclusion

In conclusion, Full House Resorts operates within the casino and hospitality industry, owning, leasing, and managing casinos and related facilities. While they have experienced growth in certain quarters, their overall revenue growth rates have been inconsistent, and their net profit margin remains negative.

The company faces challenges in the highly competitive market, with factors like the rise of online casinos impacting demand for offline facilities. Moreover, the recent opening of The Temporary property has increased operating expenses, adding pressure to their financials.

When compared to other similar companies, Full House Resorts' valuation metrics, such as P/E ratio and net profit margin, are less favorable. Caesars Entertainment, MGM Resorts International, and Penn National Gaming appear to be stronger choices based on valuation and financial performance.

While Full House Resorts has potential with its upcoming Chamonix property and American Place, investors should carefully assess the company's performance and outlook before making any investment decisions. It is crucial to consider the industry's competitive landscape and the impact of digital trends on the future revenue potential of offline casinos.

For me, I am not buying this company until it can continue its revenue momentum much longer and with an outlook of a net profit margin closer to 0.

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