INVESTING: The basics on long-term revenue growth
by Elliott Morss
November 1, 2009
In an earlier study on my Web site (morssglobalfinance.com) I examined the global entertainment industry. David G. Schwartz, author of a great book published in 2006 titled “Roll the Bones: The History of Gambling” suggested that my gambling insights contained in that study, and more specifically my estimate of the total amount spent on gambling, was low. That observation, and my own interests in gaming, have led me to write this.
According to Global Betting and Gaming Consultants, gambling revenues grew by 69 percent from 1999 to 2007. Extremely rapid growth occurred in machine gambling, with revenues up 129 percent. Informal gaming, such as charity bingo, was the only gambling activity to decline. The American Gaming Association reports that U.S. gambling revenues increased 59 percent over the 1999-2007 period, with commercial casinos lagging the overall average.
Overall, gambling worldwide continues to grow rapidly and gain greater acceptance. This acceptance is enhanced as gambling is integrated into an overall entertainment experience.
Internet gambling bears watching. According to a new report by GBGC, the online gambling yield surpassed US$20 billion in 2008. H2 Gambling Capital estimates that online revenue was $5.9 billion in 2008 from players in the United States and $21 billion from players worldwide. A recent WTO decision that went against the United States and for Antigua opens the possibility for offshore horse betting groups to compete legally with domestic pari-mutuel operators.
Gambling is often discussed along with drinking and smoking as a “sin” industry. They are lumped together in part because all are seen as addictive and consequently recession-resistant. But gambling as an industry does not perform like tobacco or alcohol. In the current recession, tobacco sales have been hardly affected, and alcohol sales are off only 2 percent. Gambling revenues, in contrast, are off 12-15 percent globally.
There are several reasons for the difference.
First, a large portion of the adult population consumes alcohol, and addiction levels are quite high. One-sixth of adults smoke, and nearly all smokers are addicted to nicotine. The American Gaming Association reports that studies have found the prevalence rate of pathological gambling to be close to 1 percent of the U.S. adult population. So one major difference is that a very small portion of the population is addicted to gambling.
Second, gambling is increasingly being promoted as an overall entertainment experience. In fact, a recent study has documented that more than 60 percent of casino revenues are generated by non-gambling activities. This makes a gambling outlay far more like a discretionary consumption item than a necessary addiction purchase.
Charles Norton, portfolio manager of USA Mutuals Vice Fund, reported on a recent USA Mutuals conference call that with the exception of Macau, gaming has not started to recover as yet. There is considerable overcapacity in the industry with a large number of new locations being built.
Dr. K.C. Ma, co-author of “Sin Stock Returns,” reported on the same conference call that the gambling industry declines more and declines later in a recession than the overall market. Dr. Ma reports further that gambling usually recovers to a greater degree, and earlier, than the overall market. But so far it is not coming back — in part because of the proliferation of casinos and the fear (in the United States) of growing Internet gambling.
Based on the GBGC Index of the 50 largest global gambling companies, it appears also that gambling stocks are far more volatile than the overall market. From its peak at the end of October 2007 of approximately 185, the GBGC 50 Index fell to about 55 in early November 2008, or by 70 percent. Over the same period, the S&P 500 fell 42 percent. Over this period, gambling stocks lost more than $150 billion in value.
In earlier articles on morssglobalfinance.com I made two points to guide stock market investing as the world gradually recovers from the global recession:
1) The dollar will weaken as the United States tries to finance its huge deficits; and
2) The growing middle classes of emerging market countries will lead the world out of the global recession.
Given these guidelines, one should search for value in gambling stocks in Latin America and Asia.
Macau is not the only locale to investigate, but it is interesting. There is a tremendous capacity increase coming in Macau, but gambling demand is already rebounding there.
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Elliott Morss
Elliott Morss, Ph.D, is an economist, author and teacher and works as a consultant to developing countries on issues of trade, finance and environmental preservation. He has served in the Fiscal Affairs Department of the International Monetary Fund and is a past president of the Asia-Pacific Group, a British Virgin Islands company with investments in Cambodia, China and Myanmar. He is currently working on a book that “road-maps” the rapidly evolving global financial services industry. He can be contacted at morssglobalfinance.com.
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