Companies in the Hotel/Gaming Industry may be divided into two categories: Those that operate strictly in the hospitality market; and, those running resorts and/or gaming businesses.

In an effort to appeal to consumers across most demographics, many hotel enterprises own upscale, mid-level, and economy properties. Such assets can also be classified as luxury, full-service, limited-service, international, and timeshare. Besides producing revenue and earnings from room bookings, companies on the hospitality side of the industry may generate proceeds from management contracts, franchise agreements, and vacation ownership programs. Management contract and franchise agreement fees are typically based on an operation's gross revenue or profitability. As well, fees may come from other services, including centralized reservations, sales, and marketing and advertising.

A considerable number of enterprises on the gaming side own and operate resorts that offer gambling, rooms, dining, entertainment, retail space, convention and meeting facilities, and other amenities. Diversified offerings allow gaming resorts to maintain decent hotel occupancy rates during seasonally slow leisure travel periods. The gaming category also includes companies that specialize in the design, manufacture, and marketing of electronic entertainment equipment and network systems.

The fortunes of the Hotel/Gaming Industry are closely tied to the health of the global economy. Equities in the group have low scores for Stock Price Stability. Only venturesome, risk-tolerant investors should take a look here.

Key Performance Measures

There are certain volume measures that are key to discerning the strength of the industry. Owned, managed and/or franchise hotels use occupancy, average daily rates, and revenue per available room (RevPAR) to monitor their operating performance. Managements need to optimize room rates and charges for amenities according to booking levels. Relevant gaming indicators include table "win" and "drop", and "slot handle". Win, also known as "hold percentage", represents the amount of money wagered that is recorded as casino revenue. Drop is the cash and net markers issued that are deposited into a gaming table's security box. Lastly, slot handle is the coinage placed into machines. Efforts to boost volume and careful review of these measures are crucial to a hotel or gaming company's success.

Gambling Markets

Both sectors of the industry face competition, but it's more intense in gaming due to geographical market limits. Las Vegas and Macau are by far the biggest gambling centers in the world. Over the past two decades, heavy spending by companies on their hotels, entertainment and other attractions has cemented Vegas's position as the gambling Mecca of the U.S. And the liberalization of gaming policies in China has allowed Macau to become the world's biggest market (by revenue). Location is always important, and nowhere is it more evident than in Macau. Indeed, this hot spot has benefited from its close proximity to Hong Kong, mainland China, Taiwan, South Korea, Japan, and other nearby countries where gaming is popular among the population. Approximately one billion people are estimated to live within a three-hour flight to Macau. Cognizant of the tax revenue potential, an increasing number of U.S. states and foreign countries are expanding areas open to gambling. With many billions of dollars yet to be spent on luxury hotels and casinos, gaming is certainly a growth sector.

In Good Times and Bad

The Hotel/Gaming Industry is highly dependent on the business cycle and consumer discretionary spending. Indeed, operating earnings tend to swing widely between good economic times and bad. During a downturn, especially a severe one, volume measures (e.g., occupancy and RevPAR) quickly deteriorate. During difficult times, hotel managements, initially, are willing to sacrifice occupancy to maintain room rates. This is so because fixed costs need to be covered to protect net profit. Too, after hotels have cut room rates, it can be a challenge to raise them, once business activity begins to recover. But in the severest of periods, price cuts eventually become unavoidable. Gaming resorts often suffer more than hotels in recessions. Tighter consumer and corporate budgets have a negative impact on gambling, leisure activity, convention, and luxury amenity revenues.

Given the capital-intensive nature of this industry, cash flow is crucial to service debt, while funding day-to-day operations and expansion. Poor economic conditions hamper cash flow, and debt interest and maturity obligations become more significant, taking funds away from strategic development programs. When under such pressure, managements often implement a number of steps to free up some cash, such as staff layoffs, efficiency improvements, reduced capital spending, and the sale of non-core assets and minority interests. The strongest members of the industry can take advantage of stressful periods by acquiring lucrative operations, fully funding development projects, and pursuing market share.

When the global economy is experiencing an upswing, Hotel/Gaming companies benefit from increased consumer leisure and corporate event spending. As volume and operating profits strengthen, managements free up outlays for property upgrades and expansion, as well as for product and service development. It's important for companies not to take on too much leverage, which can be detrimental when the cycle turns. Investors should note whether a company's annual cash flow sufficiently covers spending plans and dividends paid, if any, to stockholders. Also, there should be enough cash available to meet upcoming debt maturities.