Merrill Lynch downgrades gaming stocks

David Strow

Thursday, Dec. 21, 2000 | 11:08 a.m.

Merrill Lynch today downgraded five gaming stocks, as concerns of a gaming industry slowdown continued to build on Wall Street.

In a report issued today, Merrill Lynch gaming analyst David Anders downgraded MGM MIRAGE, Mandalay Resort Group, Park Place Entertainment Corp., Aztar Corp. and Station Casinos Inc.

Anders said his decision to downgrade the sector was primarily based on reports of a slowdown of the U.S. economy.

"At some point, that has to filter into gaming," Anders said. "I thought a more conservative stance was warranted. We're not seeing (an impact on gaming) yet, but my suspicion is that large leisure purchases tend to lag the economy on the way down and on the way up."

Anders downgraded MGM MIRAGE and Park Place from "buy" to "accumulate"; Mandalay from "long-term buy" to "long-term accumulate"; and Station and Aztar from "accumulate" to "neutral." Anders maintained long-term buy ratings on MGM MIRAGE, Park Place and Station.

A growing number of gaming analysts are growing bearish on the prospects of the gaming industry -- and of Las Vegas in particular -- in 2001. Reports urging gaming investors to be cautious have recently been issued by UBS Warburg, Bear Stearns and Lehman Bros.

While noting that fourth quarter gaming figures appear solid, Anders noted "there is overwhelming evidence that the economy and the consumer are slowing. Therefore, we believe it may be only a matter of time before this begins to show up in Las Vegas." Anders added that the "new" Las Vegas model, based much more heavily on non-gaming revenues than in the past, would feel more of an impact from an economic slowdown.

Anders also expressed concern that weakening Asian markets could impact the Strip's high-roller business, as 85 percent of high-end gamblers come from that market. He also noted that the potential closure of National Airlines and the growth of Indian gaming in California in 2001 could cause difficulties for the Strip in the coming year.

National has filed for bankruptcy, but says it will continue to operate all its flights.

Anders maintained some accumulate ratings because of historically low valuations in gaming stocks, the amount of free cash flow being produced by gaming companies, and limited new supply in Las Vegas until at least 2004.

The sole major gaming stock to avoid a downgrade was Harrah's Entertainment Inc., which Anders kept at buy.

"I still like the Harrah's geographic diversification and their operating strategy, which is continuing to yield results," Anders said.

Park Place was the hardest hit on Wall Street, trading at midday at $11.25, off 88 cents. MGM MIRAGE was off 6 cents to $25.19.

But little effect was seen on the stock prices of other gaming operators: Mandalay traded at $19.88, up 19 cents; Station traded at $14.88, up 13 cents; and Aztar was at $11.81, up 19 cents.