The gambling and entertainment sector is a great sector to operate in for a number of reasons. Firstly, gambling tends to be recession proof, which makes the industry somewhat defensive. Additionally, the regulations involved are extremely strict, giving existing operators a competitive advantage since there are large barriers to entry. Lastly, because it is gambling, profitability comes naturally; the most important thing for companies is to drive as much foot traffic as possible.
In Canada, most casino and lottery operators are Crown corporations. This gives any public company a competitive advantage, as they are operating alongside the government in a highly regulated industry. One company that is a well-known casino operator is Great Canadian Gaming (TSX:GC).
Great Canadian is a casino, entertainment, and hospitality company with 28 properties operating in four geographies. The U.S. segment and Atlantic Canada each have three casinos. In B.C., Great Canadian operates nine casinos and a casino/resort. In Ontario, the company has been expanding aggressively. At the end of 2018, Great Canadian was operating 12 casinos and race tracks.
The new properties in Ontario look promising for future growth. The company has been renovating and increasing the number of tables and machines to increase the economies of scale. It has also been working hard to increase the customer experience to gain new customers and bring returning customers back more frequently.
Great Canadian has a lot of great qualities investors want to see out of a company. First and foremost, the company has a solid management team. The management team is known for running high-quality casinos. Management also has track record of making great deals to buy existing casinos. The strategy of acquiring casinos and then renovating and optimizing is nothing new to Great Canadian, and the ability to consistently create organic growth for the company has paid off.
Going forward, Great Canadian is still committed to finding new growth opportunities. Management has stated that if an opportunity presents itself that is valued fairly and fits the investment criteria with regard to regulation and strategy, they will make the investment whether it’s in a new or existing jurisdiction.
In terms of financial performance, Great Canadian has done remarkably well. Return on equity is consistently at or around 20%. The company is well capitalized with net debt/EBITDA less than one times. The balance sheet is very strong, and over the years management has done well to not dilute shareholders while expanding the business, which is a major positive for investors.
Having a look at past performance, an investment of $10,000 a decade ago would be worth just shy of $150,000 today. That is an incredible performance, and given analysts’ projections for 2019 and 2020, the growth doesn’t look like it’s about to stop. Analysts are estimating that revenue and EBITDA will grow around 10% for the next two years.
It is clear why Great Canadian has had such a pristine track record. The high competitive advantage it has and impressive management running the show consistently return high levels of income. If Great Canadian keeps this up, it should continue to outperform into the future.
Stay hungry. Stay Foolish.
