Three top gaming stocks downgraded due to LV airport concerns

Gary Thompson

Wednesday, Feb. 18, 1998 | 10:28 a.m.

One of Wall Street's top-rated gaming analysts sparked a selloff of gaming stocks Tuesday when he warned that transportation bottlenecks threaten the profitability of Las Vegas casinos.

Calling it "one of the most significant challenges the city has ever faced," Bear Sterns & Co. Managing Director Jason Ader said Las Vegas must find a way to increase air service to McCarran International Airport.

"Just because McCarran will offer a sufficient number of gates to accommodate growth in Las Vegas, there are no guarantees that the airlines will provide sufficient seat capacity," Ader said.

"Las Vegas airfares are currently the lowest in the nation. Compounding the problem is slow mid-week service to Las Vegas, which makes airlines reluctant to commit larger aircraft to the market.

"While the D Concourse expansion at McCarran will make use of 17 of the 26 new gates planned, none represents an expansion in service by a major airline.

"Despite an increase to the number of gates at the Las Vegas airport, (an) effort made to improve air service to facilitate visitor counts remains one of the most significant challenges the city has ever faced," he said.

The GAX, an index of 15 big gaming stocks, lost about 2 percent of its value after Ader cut his ratings for three of the top operators in the industry. Mirage Resorts Inc., MGM Grand Inc. and Circus Circus Enterprises Inc. were downgraded from "attractive" to "buy."

Circus Circus fell 5 percent, closing at $22.6875, down $1.182, in trading of more than 1.7 million shares, nearly triple average daily trading volume over the last three months.

Mirage closed at $23.5625, down $1 or 4 percent on heavy volume. And MGM Grand slipped 2.5 percent, closing at $37.1875, down 93.75 cents.

Ader said plans by airlines serving Las Vegas to scale back operations, Asian economic problems and the outlook for "uninspiring Las Vegas earnings over the next three to six months" prompted the ratings changes.

"Our comments today aren't meant as an alarmist negative call on the gaming stocks," he said.

But, Ader continued, "As we study the current challenging environment in Las Vegas with our expectations for continued difficult business conditions and the uncertainty surrounding the major drivers of future profitability, we cannot justify having buy ratings on stocks with substantial Las Vegas Strip exposure until the earnings outlook improves."

And that outlook, he said, "will directly relate to how air service to Las Vegas is improved."

Dave Ehlers of Las Vegas Investment Advisors has been warning about the airline issue since mid-summer 1996.

"Jason Ader is not a wide-eyed pessimist," Ehlers said. "He is the top gaming analyst on Wall Street, according to Institutional Investor's All-America rating.

"The Las Vegas gaming industry is now on notice that Wall Street is aware that its future may be severely impacted by lack of visitors due to transportation deficiencies.

"If the powers-that-be in Southern Nevada now fail to address these issues head on by funding an effort to launch a major air carrier, casino operators stocks are going to be in for some very difficult days."

Ehlers and Ader noted that Mike Conway, a former America West Airlines executive, is trying to start up a Las Vegas-based, low-fare carrier that would service long-haul routes existing airlines aren't adequately addressing. To date, only one Las Vegas casino operator has reportedly committed to help finance the new carrier.

Ader said the main reason for maintaining even an "attractive" rating on the three big casino operators is industry consolidation.

"Based on the implied valuations of recent gaming-industry acquisitions," he said, "Mirage, MGM Grand and Circus Circus are attractively priced.

"Mirage and MGM are the leading companies in the industry with real estate that cannot be duplicated. We believe that both companies should trade at premium valuation levels."

But the most important new issue, he said, is that air service to Las Vegas "is getting worse, not better." And he said it's up to the local gaming industry to solve the problem.

"If they don't step up to resolve this issue, these gaming stocks will become strong 'sells,"' he said.