Columnist David Ehlers: Visitor numbers are shaky, but gaming stocks stay steady

David Ehlers

Friday, May 30, 1997 | 11:44 a.m.

ABOUT 7.6 MILLION people visited Las Vegas in 1997's first quarter -- a 5.9 percent gain over the year-earlier period. Las Vegas Convention and Visitors Authority reports there are 12.6 percent more hotel rooms in March vs. a year ago. Occupancy rates have declined to 89.5 percent, reflecting what appears to be a near-term oversupply of rooms. Room prices, accordingly, have a decidedly softer tone with resulting pressure on room profit margins.

Despite the well-advertised shortfall of visitor and gaming revenue numbers, gaming stocks, as measured by GAX, a gaming stock index (futures traded on the Chicago Board of Exchange) are holding their own.

After a 15 percent gain in the first five trading sessions in May, GAX holds within the 215 to 220 range vs. its year low of about 19.

I am inclined to believe that the flow rate into new mutual fund purchases may be partly responsible. In the week ending May 21, the public poured $4.8 billion into equity funds. Despite some fairly substantial increases in the short interest of several major gaming operators (Circus Circus Enterprises Inc. and Mirage Resorts Inc.), gaming stocks, for whatever reason, are acting better than they did in 1996.

It appears ITT Corp. is arming itself with considerable cash from the sale of a number of assets for a major battle with Hilton Hotels Corp. over the latter's hostile takeover bid. This and other factors cause us to believe that there are a few billion dollars awaiting further opportunity in gaming's consolidation period. If so, the industry's quality operators may likely not get any cheaper.

Prior additions to room supply have been absorbed quickly. Not so this time. Does this mean Las Vegas fundamentals have changed? I don't think so. Throughout 1996, airline fares from Las Vegas' 10 largest feeder markets declined so that many Southern Californians choose to fly rather than drive. Therefore, air travel soared while driving declined in 1996's fourth quarter. This year, however, air fares have recorded a sharp gain, and many people, in my view, have canceled Las Vegas stays. 1997's first quarter air travelers increased only 1.9 percent, while California drivers (counted at the Yermo, Calif., inspection station) increased 9 percent. March recorded a gain of 15 percent.

Primadonna Resorts

I have had much to say about Primadonna Resorts (Nasdaq, PRMA -- $22) due almost solely to what I perceive to be major values building in its 50 percent-owned New York-New York. Previous columns have detailed the Saturday afternoon Las Vegas Investment Advisors' weekly surveys of business levels at the complex. Memorial Day weekend provided further evidence of its still-growing appeal. This holiday weekend recorded greater visitor interest than noted on Presidents Day in February.

Data included table game use estimates, minimum table bets and other measures of player and visitor activity.

Minimum table game bets were substantially larger than Presidents Day weekend table game use, notwithstanding the increase, were at the highest levels we have observed.

Lines waiting to play the newer and more successful levels of electronic gaming devices (slots), such as Wheel of Fortune and Totem Pole, were substantially greater than prior weeks.

New York-New York isn't Primadonna's only asset. Trade employees and customers inform us that business has an improved tone at Primadonna's resorts in Primm. The company's quarterly operating results through the first quarter have been hurt by fewer motor vehicle traffic. The current quarter may be a record setter for Primadonna as auto traffic rebounds.

The New York Stock Exchange has filed a trademark infringement lawsuit, alleging that New York-New York has improperly duplicated the facade of the exchange. "... These are two distinct things, entertainment and capital formation, and people should not associate one with another." It should be noted that the New York Stock Exchange includes the extremely speculative stock-option trading posts. Index and stock options have raised regulators' eyebrows, many of whom insist that such securities have many characteristics of gambling. If this is indeed so, then poor little New York-New York, the casino, can't even hold a dim candle to the amounts of money allegedly being gambled in the fast-paced option and index markets. From my perspective, the suit provides NY-NY some free publicity that may be priceless.