Gaming Stocks Are on New Hot Streak as Vegas Keeps Growing

Gaming stocks are on a roll these days amid signs that the Las Vegas casino industry is finally pulling out of a severe two-year slump.

But predicting the recovery’s duration is a much riskier bet. That’s because the industry is still being tested by a number of adverse trends, even though Las Vegas remains among the top tourist destinations in the world with 30.6 million visitors last year.

“There’s no shortage of concerns” about the gaming companies, said analyst Dennis Forst of McDonald & Co. Securities in Los Angeles.

They include a drop-off in the number of foreign high-rollers amid economic slumps in Asia and Latin America, the loss of revenue to Native American gambling sites, and the arrival of yet another batch of gigantic, opulent hotel-casinos on the Las Vegas Strip that could saddle the city with too many properties chasing too few gamblers.

The first of the new casinos was Mirage Resorts Inc.’s 3,000-room Bellagio, which opened in October, and the next one, the 3,700-room Mandalay Bay from Circus Circus Enterprises Inc., opens its doors today.

On deck are 6,000-room Venetian, a $1.8-billion project being developed by businessman Sheldon Adelson on the site of the old Sands Hotel, and Paris-Las Vegas, which is being built by Park Place Entertainment Corp., a gaming company that was recently spun off from Hilton Hotels Corp.

“There is reason to be cautious [about the stocks] with regard to the new supply” of rooms coming this year, said analyst Jason Ader of Bear, Stearns & Co. in New York.

But others noted that Las Vegas has a history of foiling the dire predictions of those who feared that a wave of new resorts would penalize the industry.

“It’s a theme that’s been echoed for decades,” said Anthony Curtis, publisher of the Las Vegas Advisor, a consumer newsletter. Yet “the data seems to indicate that . . . people are saying, ‘We’ve got to go to Las Vegas and see all of these new places,’ ” he said.

That’s why analysts have been busy marking up their ratings of gaming stocks lately, which is helping propel the shares sharply higher.

The Chicago Board Options Exchange index of 11 gaming stocks has jumped 14% in the last month, making it one of the market’s best-performing sectors in that period. Individual gainers include Mirage, up 32% in the last month; MGM Grand Inc., up 22%; and Harrah’s Entertainment Inc., up 12%.

Analysts explain the renewed optimism this way: Gaming stocks had been beaten down so badly that early this year they began appealing to “value” investors looking for bargains. The CBOE Gaming Index had plunged 24% during 1997 and 1998, while the benchmark Standard & Poor’s 500 Index had surged 66%.

Also, the Las Vegas Convention & Visitors Authority announced that the number of visitors to the city in December jumped 6.7% from a year earlier, the biggest monthly gain in three years. Hotel occupancy rates and airline-passenger traffic to Las Vegas also rose.

Some of the gaming companies also posted better-than-expected results for 1998’s fourth quarter. “We had the best quarter we’ve had on the Strip in the past two years,” said Circus Circus President Glenn Schaeffer.

In addition, many investors view the Bellagio’s initial performance as encouraging. The $1.6-billion resort didn’t depress results at most other Las Vegas casinos and instead seemed to help spark the recent jump in visitors.

That bodes well for the industry as Mandalay Bay and the other new resorts come on line this year. Indeed, early bookings for Mandalay Bay are “encouraging” and are providing “minimal cannibalization” of Circus Circus’ existing Las Vegas properties, which include the Circus Circus and Luxor hotel-casinos, said Naomi Talish, an analyst with Merrill Lynch & Co.

Finally, investors are looking at 2000 and beyond, when new construction in Las Vegas will tail off, the gaming companies’ profits will compare favorably with their recent poor levels, and the industry will generate substantial cash flow that can be used to pay down debt, buy back stock or make acquisitions, the analysts noted.

“We believe in the year 2000, free cash flow from the five major companies in the industry--Circus Circus, Harrah’s, Mirage, MGM Grand and Park Place--could be north of $1 billion,” said McDonald’s Forst. Taken together, all of these trends have “improved confidence levels among investors, and that’s why we’ve seen the stocks moving up,” Ader said.

But he warned that investors “should tread very carefully,” because the prospect of excess room capacity caused by the opening of Mandalay Bay and the other new resorts means “that beyond the April-May time period we have very little visibility” for the industry’s outlook.

Those new properties could either “ignite more competitive pressures on the Strip and result in difficult business conditions, or generate substantial consumer demand,” but it’s too early to tell, Ader said.

And if the volume of tourists and gamblers doesn’t grow in tandem with all the new capacity created by the new resorts, the operators of those hotel-casinos could run into big problems, analysts said.

But Circus Circus’ Schaeffer said he’s optimistic. Although the openings of Mandalay Bay, Paris and the Venetian over just a few months “will be a stronger test” of the industry’s vitality than was Bellagio’s debut, Schaeffer said, “Wall Street has concluded that investors were overly fearful” about the effect of all the new resorts.

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On a Roll?

The CBOE Gaming Index of 11 stocks, a loser in the last two years, is heating up. Monthly closes and latest:

Monday: 195.69

* Source: Bloomberg News