Analysts divided over LV casino business trends

David Strow

Friday, Nov. 17, 2000 | 10:54 a.m.

Concern is building among Wall Street analysts over a series of reports that business along the Las Vegas Strip weakened in September.

But what that means in coming months for Strip casino operators -- and, by default, for investors in gaming stocks -- is a topic of growing debate.

The possibility that September was a harbinger of a gaming downturn was first raised by gaming analyst Robin Farley of UBS Warburg last week, in the wake of a report by the Nevada Gaming Control Board that gaming revenues on the Strip fell 9.4 percent in September from September 1999. Farley downgraded MGM MIRAGE and Harrah's Entertainment Inc., and wrote that "the risk in buying (gaming) stocks now -- given the uncertainty introduced by this deviation from the year's positive trends -- may not justify the potential upside."

"This isn't about what it means for September, it's about what it implies for trends going forward," Farley said. "Whether September is an old number doesn't matter. It means it's an end of two years of year-over-year revenue increases.

"I don't expect demand to go into a downward spiral, but the point is it may not be the strong demand trends we've seen."

Others believe it's far too early to assume the gaming industry is headed into rocky territory.

"(The September downturn) is a reason to raise a red flag and gnash your teeth, but it's not a reason to get bearish yet," said Dennis Forst, gaming analyst with McDonald Investments. "September was destined to be a difficult comparative month, given how terrific September '99 was. But it would be premature to get strongly bearish right now."

So far, investors have shown little concern that trouble may be ahead. Since the Nov. 9 control board report, Park Place Entertainment Corp. stock has risen 7.6 percent, Mandalay Resort Group is up 1.6 percent and Harrah's Entertainment Inc. is off less than 1 percent. The one glaring exception of the past week has been MGM MIRAGE, which is off 9 percent since the report and Farley's downgrade.

On Wednesday, the Aladdin reported that its quarterly results were hurt by a poor September, marked by 77 percent occupancy, a $130 average daily room rate, and "the lack of free and independent traveler demand." In a Wednesday report, Farley said the Aladdin reinforces the reasons for her concerns -- and said investors may be missing the point about September's numbers by treating them as "old news."

"Because the Aladdin is the newest property on the Strip, it should be expected to see strong (free and independent traveler) demand," Farley wrote. "Therefore, this weakness could reflect an environment for FIT demand that other properties in the market may be seeing as well."

After adjusting Strip revenues for the Aladdin, Farley estimated that same-store revenues on the Strip were down nearly 12.5 percent in September.

"If the (addition of) the Aladdin can't offset (the impact of) moving a convention to August, the city's in trouble," Farley said. She was referring to the shift of a convention from September to August, hurting gaming revenue comparisons for September.

Forst, however, believes investors shouldn't read too much into the Aladdin's experience.

"Frankly, the Aladdin is not in the same category as those other (new) properties, in terms of a marketing team, a known name and an organization to help fill up those rooms," Forst said.

Forst does believe more difficult comparisons will be coming in the months ahead, particularly in November, since November 1999 was such a strong month.

"In October I think they're O.K., and December I'm hoping will be very good compared to last year's millennium flop," Forst said.

Yet Forst believes gaming stocks, particularly Mandalay Resort Group, remain good long-term buys.

"I'd be a little more cautious toward the four majors (Park Place, MGM MIRAGE, Harrah's Entertainment and Mandalay) than I was a couple of weeks ago," Forst said. "If (investors) take a longer-term horizon, all four of the big stocks are in a long-term buying range."

Forst's cautious attitude is shared by other Wall Street analysts.

"We continue to believe that the Las Vegas market will face increasingly challenging comparisons going forward, with the exception of the New Year's period," wrote Bear Stearns analyst Jason Ader last week, in a report downgrading Mandalay Resort Group.

In a Nov. 1 report on MGM MIRAGE -- issued prior to the control board report -- Wasserstein Perella Securities Inc. analyst Todd Jordan also expressed concerns.

"Although trends in Las Vegas continue to be very strong, we believe the environment could become more difficult in 2001," Jordan wrote. "Specifically, growth in Las Vegas and Nevada could slow due to: more difficult comparisons on the Strip without significant new supply to draw increasing customer traffic; the potential for less vigorous consumer travel due to a slower economy and higher fuel prices; and the potential effort of Nevada-style gaming in California."

But do "difficult comparisons" to a 1999 that saw record growth on the Strip translate into a downturn for the industry? Ader doesn't believe so, citing strong reports from MGM MIRAGE and Park Place Entertainment for the quarter ending Sept. 30.

But don't expect the kind of growth Las Vegas has been accustomed to in recent quarters, he warns, given reports of "windows (and) periods of overall softness in the market."

"We continue to see initial signs of moderating room growth in Las Vegas, but do not perceive this to be the end of the growth cycle for this market," Ader wrote. "We believe Las Vegas will continue to experience growth capable of driving year-over-year increases in property-level (cash flow), but do not believe the market will experience the same level of growth as it has over the past two years."

But other analysts remain solidly bullish on the market.

While noting that the Strip faced "difficult comparisons" in September, CIBC World Markets gaming analyst William Schmitt noted that "since most gaming companies have reported their (September quarter) earnings results, the weak September performances are already included in the stock prices." In particular, Schmitt recommended Park Place, Harrah's and Station Casinos Inc.

"In the continuing political and economic uncertainty, we believe gaming stocks to be a safe haven for investors seeking to limit downside risk," Schmitt wrote.