Lehman Bros. resumes industry coverage, urges caution in investing

David Strow

Tuesday, Dec. 19, 2000 | 11:15 a.m.

Wall Street firm Lehman Bros. today resumed coverage of the gaming industry -- and promptly advised investors that gaming stocks may be a risky bet in 2001.

In her initial report, analyst Joyce Minor said the slowing of Las Vegas' growth, lack of new supply and a slowing national economy "will mean Las Vegas is less exciting." New supply growth could fall as low as 2.3 percent in 2002, Minor wrote.

"We believe that Las Vegas is more likely to be impacted by a softer economic climate than regional, drive-to gaming markets," Minor wrote. "Just as positive momentum has worked to the group's benefit in the last two years, less robust Las Vegas trends could spur negative investor psyche and adversely affect the big cap group in 2001."

Minor issued "buy" ratings on Park Place Entertainment Corp. and Harrah's Entertainment Inc., saying their geographic diversification outside of Las Vegas made them attractive gaming investments. Minor estimated Park Place earnings per share should increase by 14 percent in 2001, driven by growth from the Caesars World and Grand Casinos portfolios, a $200 million decline in debt, and a $530 million drop in capital expenditures.

Despite Harrah's tax negotiations over its New Orleans casino, disappointing results from the Rio and the recent bankruptcy filing by National Airlines, Minor wrote that "Harrah's business strategy and positioning going into 2001 is sound and we are positive on Harrah's as we expect that the issues that have plagued them in 2000 will either disappear or improve in 2001."

Minor issued "neutral" ratings on MGM MIRAGE and Mandalay Resort Group. While calling MGM MIRAGE "the gold standard" of gaming, she noted that its heavy exposure to the Las Vegas market kept her from recommending the stock.

"A continued narrowing of this premium (of MGM MIRAGE stock the rest of the gaming industry) would cause us to re-examine our rating, as we are long-term bulls on these assets and the abilities of this management team," Minor wrote.

In the case of Mandalay, Minor expressed concerns both about the company's Las Vegas exposure and its "disappointments" in issuing a neutral rating. Noting the company's repurchase of 17 percent of its stock this year, Minor said there is speculation Mandalay might attempt to go private in the long term.

"Mandalay has been very inconsistent with regard to earnings due to its high fixed coast basis and earnings disappointments are common," Minor wrote. "We believe Mandalay shares are fairly valued."

Minor also issued an "outperform" rating on Station Casinos Inc., calling it "without question the Las Vegas locals leader." While noting that its market position made it unlikely to be affected by a slowdown in the Las Vegas visitors market, Minor said that the integration of Santa Fe, Fiesta and the Reserve into Station's portfolio "would require ... patience in 2001."

"We believe 2001 will be a transition year and the upside will not be evident until 2002, when little new supply is expected to enter the locals market," Minor wrote.

Minor also initiated coverage on: