Columnist David Ehlers: Is NY-NY a Wall Street success story?

David Ehlers

Friday, Jan. 10, 1997 | 11:59 a.m.

By 6 p.m. on opening day, the resort's operators were estimating first-day crowds of as high as 100,000 persons. By Tuesday, that number was increased to 600,000 persons for the first two days.

Thoughtful observers and investors may wish to visit "the biggest city in Las Vegas" and formulate their own opinions, as I have following numerous visits following the opening. As of this writing, its owners, MGM Grand and Primadonna Resorts, have made no public announcements of any numbers. However, discussions with registration clerks, bellhops, slot technicians, dealers, cocktail waitresses and casino personnel all clearly indicate to me that its developers have struck major paydirt.

My opinions are hardly an isolated view. Several CEOs of major competitors, including the industry's biggest names, have privately indicated that New York-New York may likely be the most spectacularly and uniquely themed casino-based destination resort ever developed.

Wall Street's skepticism prior to the opening is clearly reflected in the stock-price performance of the two owners, MGM Grand and Primadonna, prior to the opening.

Tom Ryan, Bankets Trust's gaming analyst, formulated his "Four Month Rule" some time back. The rule suggests buying the stocks of gaming operators four months before a new resort opens, because such stocks tend to advance about 40 percent during pre-opening periods. Following the Stratosphere debacle, Rayan's "rule" lost its magic. Thus, both MGM Grand and Primadonna and, for that matter, Rio hotel-casino, provided slightly negative returns during four-month-prior-to-opening periods.

The meaning? Wall Street's bear market in gaming shares during the last six months of 1996 caused the Street's complete abandonment of enthusiasm for virtually all shares of gaming operators. A watershed event, as I view New York-New York's opening, could change sentiment very quickly.

It is not too early to consider the opening's implications. Consider:

* Will the crowds stay in place? I count a total of almost 25,000 rooms within a scant few hundred yards of New York-New York. Thus, despite admittedly less-than-ideal parking conditions, the new facility is strategically placed amid a sea of hotel rooms.

Once a facility establishes its crowd-pleasing characteristics, such numbers tend to perpetuate themselves. Note, for instance, that The Mirage opened in late 1989 (more than seven years ago), amid heavy crowds that have never left. If those factors aren't enough, consider the uniqueness of New York-New York's highly detailed theming. THe evidence appears solid that the crowds may stay in place.

* Will New York-New York attain Wall Street's financial expectations? Jason Ader, Bear Stearns' gaming analyst, was quoted as indicating that the new facility may generate earnings of $100 million, compared to his estimate for Monte Carlo of $120 million.

Although it is early to speculate on what might ultimately result, these numbers are critically dependent on the higher-margined room and casino revenues. For instance, in October, Strip slot win per unit was $101, and table game revenues were $2,176 per unit. Again, given what I perceive to be expected crowd levels, these numbers have the potential to be exceeded and, depending on how its owners position the property, perhaps substantially so.

* Will New York-New York remain a 50-50 joint venture? Clearly, this is the proverbial $64 question. It is also one to which both MGM Grand's and Primadonna's management will devote much thought but little or no public comment. The possibilities, as I see them, are that one of the two might exercise the provisions of buy-out clauses or that MGM Grand might purchase all of Primadonna.

Primadonna has experienced some management shifts over the past several years, and Wall Street seemed somewhat divided, prior to the recent opening, on its outlook. Here again, such opinions change radically without notice, but I am inclined toward the belief that the opening of New York-New York makes yesterday's opinions by gaming analysts of little significance in light of the morning-after realities.

It is timely also to consider what may be the value of New York-New York to its owners. If, in fact, this facility has the financial capability to attract gaming win per slot and table of one-third better than Strip averages, casino revenues may attain levels permitting New York-New York to obtain earnings before interest, taxes and depreciation of $130 million or thereabouts, its value to its owners may approach $1 billion.

Such a value would represent for its one-half interest to MGM Grand of about $9 per share (some 25 percent of its market price) and, to the much-smaller Primadonna, some $16 per share or nearly its entire present market value of about $18.

Clearly, much has changed in a very short period of time (as Wall Street slept on this one). If history is any guide, 1997 will be quite a year for both the long-awaited New York-New York and its developer-owners.

DAVID EHLERS is chairman of Las Vegas Investment Advisors and is associated with American Investment Services. He writes frequently about business and financial matters in Southern Nevada. He can be reached at 889-1695.