Casinos optimistic, assert gaming stocks undervalued

David Strow

Friday, Jan. 12, 2001 | 11:11 a.m.

Casino stocks haven't been a favored investment of investors in recent months.

As fears of a recession loom, and Nevada's gaming win numbers begin to retreat from the torrid pace of a year ago, selling has taken a big bite out of the stock prices of some of Las Vegas' largest gaming operators.

On Thursday, gaming companies received a chance to try to change investors' minds at the American Gaming Summit, a two-day event co-sponsored by Wall Street brokerage Bear Stearns, Casino Journal Publishing Group and the law firm Lionel Sawyer & Collins.

Executives from large-cap gaming operators took the chance to air their frustrations -- and their beliefs that their companies, as well as Las Vegas -- are well protected from any economic troubles that may await the nation in 2001.

"People have always been skeptical of Las Vegas," said Jim Murren, president and chief financial officer of MGM MIRAGE. "Yet Las Vegas has always done better than the naysayers expected. History is on our side."

MGM MIRAGE has arguably been the most vocal in its disagreement with the pessimistic outlook. Despite continued statements that the company's business continues to show strength -- including a press release last week that the company would beat fourth-quarter earnings estimates -- MGM MIRAGE's stock continues to fall. On Thursday, the stock closed at $29, off 25 percent from its 52-week high.

Yet Murren argued that MGM MIRAGE is in a position of strength. Its strong position in the high-end business allows it to keep high rollers playing at its tables for long periods, reducing the volatility of its high-end results. And he noted that the company's strong entertainment product helped diversify the company's cash flow.

Murren also pointed to continued economic benefits from the buyout of Mirage Resorts Inc.

To date, Murren said MGM MIRAGE has achieved $117 million in annual cost savings after combining the companies. That number could go as high as $150 million, he said, and far exceeds the original savings projections of $95 million per year.

And he said the company has sold off $230 million in Mirage Resorts assets, including $150 million in art, $60 million in real estate and $10 million in aircraft -- "a lot of toys," Murren said to laughter from the audience.

Though admitting that "we'd be fooling ourselves if we didn't think (a recession) wouldn't impact us," Murren said a downturn in Las Vegas could actually create opportunities for MGM MIRAGE.

"Certainly we can take advantage of a declining economy in that we're stronger than our competitors," Murren said. "We can take advantage by building our (market) share or making acquisitions."

For now, Murren said the company will focus on aggressive debt repayment -- it's paid down $528 million in debt since merging with Mirage -- and expansion opportunities, either by building new properties, expanding existing ones or acquiring competitors. He pointed to the Boardwalk site near the Bellagio, land near the MGM Grand and sites in Atlantic City as places where new developments could occur.

One company that is actively committed to expanding, however, is Las Vegas Sands Inc., owner of the Venetian. During a presentation, Las Vegas Sands President Bill Weidner showed audience members a rendering of a 1,100-room tower to be added on top of the Venetian's parking garage. The three-sided building will feature an elaborate, lush courtyard in the center -- but Weidner was quick to caution afterwards that a price tag had yet to be set on the project, and a timeframe for developing it had yet to be established.

Weidner based his bullish outlook on the Venetian's reliance on convention business -- a business he called "recession resistant," as conventions continue to occur whether or not the economy is booming.

"You might see a small change in margins (in convention business during a recession), but I don't see a fundamental change ahead," Weidner said.

Moreover, Weidner pointed out that Las Vegas had a huge opportunity to grow its business by expanding its convention base. Though Las Vegas hosts 226 big conventions a year, the U.S. and Canada have 4,333 annual conventions -- and each one provides another opportunity for Las Vegas to continue its growth.

"There's a lot of room for Las Vegas to grow," Weidner said. "There's plenty of demand out there. We just have to go get it."

Yet Weidner also expressed confidence that the "free and independent travelers" would be unlikely to give up their vacations to Las Vegas during a recession -- especially at the high end occupied by the Venetian.

"When California was in the tank (in the past), it seemed demand (for visits to) Las Vegas remained strong," Weidner said.

In the fourth quarter, Weidner said the Venetian recorded an average daily room rate of $194, up from $178 a year ago, while the ADR over the first 10 days of 2001 has run at $208.

Because of this strength, Weidner projected a second room tower would generate $49 million in annual cash flow, not including benefits from additional gaming.

Other capital projects planned by the Venetian to help spur demand this year include a doubling of the size of the resort's baccarat area, the addition of 12 high-roller suites and the construction of two art museums to house works from the Guggenheim Museum in New York and the State Hermitage museum in St. Petersburg, Russia.

Also taking a bullish outlook on the future of Las Vegas and gaming was Park Place Entertainment Corp., a company whose stock came under pressure last week after it reported fourth-quarter earnings would be well under expectations.

Park Place closed Thursday at $10 per share, off 35 percent from its 52-week high. Yet Park Place Chief Financial Officer Scott LaPorta believes that price is far too low, noting the company is projecting it will produce $3 billion in free cash flow over the next five years. He called Park Place "a prodigious producer of cash."

"Our 6.3 (share price to cash flow) multiple doesn't make sense in our minds, and we think that will expand in future quarters," LaPorta said.

LaPorta, like his colleagues, doesn't believe investor jitters over Las Vegas are justified. But he bases his argument on the fact that no new resorts are scheduled to open on the Strip over the next few years.

"There's no new supply for the next few years to take away share from everyone else (in Las Vegas)," LaPorta said. "We definitely should see demand growth outstrip supply growth."

Demand should continue to grow at least at the pace of the national economy, LaPorta said, and could grow faster because of aggressive marketing efforts by gaming companies and the Las Vegas Convention and Visitors Authority.

Park Place, like other companies in the industry, is weighing a number of expansion opportunities. They include two land parcels the company owns in Atlantic City and continuing talks with the Mohawk tribe to develop a resort casino in the Catskills near New York City.

"If you think about what Foxwoods (in Connecticut) does, this is a tremendous growth opportunity for our company," LaPorta said. The company would receive 30 percent of the proposed casino's income, he said.

But some additional building in Las Vegas is possible in the future, LaPorta said, noting that the company has 15 acres of land adjacent to Caesars Palace to add additional hotel rooms, high-end suites and casino space.

Of the company's $2 billion in free cash flow over the next four years, LaPorta said it was likely one-third would be used to pay down debt, another one-third would be used to buy back stock, and the final third would be used to expand, either by acquisition or by expanding existing properties.

But LaPorta had little new information to provide on the Park Place sale that has the gaming industry abuzz -- the now-foundering plans to sell the Las Vegas Hilton to Los Angeles developer Ed Roski Jr. for $365 million. Only a few more days remain for that deal to close, LaPorta said.

"We don't think that's going to proceed," LaPorta said. "He has another day or two to close ... if he doesn't do that, the transaction will be cancelled. We continue to fulfill all of our obligations."

LaPorta said Park Place won't attempt to sell the property again if the deal fails, since six months of declining financial performance there would make it difficult to receive a fair price for it.

Soon after LaPorta's presentation, Roski spoke at the convention. Though rumors had been flying that Roski was having difficulty coming up with additional cash to close the Hilton deal -- and that he was considering a lawsuit against Park Place if the deal failed -- Roski never mentioned the Hilton deal in his speech. Roski declined to comment on the deal afterwards.

However, Roski also made it clear that he's going to expand his holdings in Las Vegas, one way or another. Currently, Roski owns the Silverton hotel-casino at Las Vegas Boulevard and Blue Diamond Road.

"While not all opportunities come to immediate fruition, I've found that the next one is often right around the corner," Roski said.

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