Geographic diversity seen as key casino asset in downturn

David Strow

Thursday, Oct. 18, 2001 | 9:44 a.m.

Now that three major gaming companies have reported earnings, one trend is clear -- geographic diversity can be a big insurance policy for a gaming company.

Harrah's Entertainment Inc., Boyd Gaming Corp. and Aztar Corp. all have casinos in Las Vegas, and all these casinos posted significant downturns in the days following the Sept. 11 terrorist strikes. Yet all three this week also reported strong financial performances from their riverboat casinos scattered throughout the Midwest -- and all three were able to post earnings increases on the strength of these riverboats.

"If (gamblers) don't do their trips to Vegas, they may in the short-term supplement it with more gambling locally," said Larry Klatzkin, gaming analyst with Jeffries & Co. "Whether it's a racetrack with slot machines in West Virginia, a casino in Peoria, Ill., or Atlantic City, people are substituting trips to Las Vegas ... with gambling more locally."

Klatzkin, together with CS First Boston gaming analyst John Leupp, Bear Stearns analyst Marc Falcone, and McDonald Investments analyst Dennis Forst, spoke Wednesday at a session of the World Gaming Congress and Expo, which will continue through Friday at the Sands Expo and Convention Center.

Projecting numbers for the rest of Las Vegas is the tricky part, the analysts said, without more earnings reports. Leupp estimated each dollar lost on average daily room rates would translate into $20 million less in cash flow for Strip casinos each year. And each percentage point decline in visitation will probably take 3 percent to 4 percent off the cash flow of Strip casinos, he said.

And rising room rates have been key to Las Vegas casino profits in the last several years, Falcone said.

"It will take a long time for operators to recoup the pricing leverage they experienced ... it could take a longer time to reach those levels of profitability again," Falcone said.

MGM MIRAGE and Park Place Entertainment Corp., two of the Strip's largest casino operators, won't report earnings until month's end. And Mandalay Resort Group won't report until mid-November.

"Obviously, the destination resorts in Las Vegas are being the hardest hit," Merrill Lynch gaming analyst David Anders, who wasn't on the panel, said in a phone interview. "But until we get MGM (MIRAGE) or Park Place (Entertainment Corp.), it's hard to tell how hard the hit was to the city."

Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown, said it's likely MGM MIRAGE's properties performed better than the Strip properties that have already reported earnings (the Stardust, Harrah's Las Vegas, the Tropicana and the Rio).

"They provide great entertainment offerings, which enables them to generate strong visitation from customers who stay at other hotels," Zarnett said in an interview after the panel discussion. "Their performance on a relative basis will be stronger than the third-tier properties."

The earnings reports of recent days are also encouraging for Park Place, Zarnett said. "Their concentration of assets in Las Vegas is relatively minimal, therefore the impact for the overall company will be less," he said. "And they do have properties in these other markets that are generating very strong returns."

Forst said he believes the current strength of riverboats could spur Las Vegas companies to action.

"This may accentuate the need for geographic diversification," Forst said. "This business in the Midwest has been virtually unchanged ... that's going to change the way some companies here in Las Vegas have been provincial (about gaming operations)."

Las Vegas presents the best opportunity for the highest long-term returns, Forst said.

"If you look at the longer term, I think all the major companies in the group, the big four companies that dominate the industry (MGM MIRAGE, Park Place, Mandalay and Harrah's) ... those shares have all come to a point where they're interesting," Forst said. "If you're willing to take a longer term viewpoint and deal with the uncertainty, which a lot of investors aren't, I think they're all in buying ranges."

In the short term, "I like the riverboat gaming companies," Forst said.

One of the biggest debates among the panelists Wednesday was the effect another terrorist strike would have on Las Vegas' recovery.

"The more they occur, the less intrusive they'll be on our way of life," Forst said. "If we do have more attacks, it will keep the foreign visitor away for a longer period of time, but domestically, over time, we'll get inured to the situation, and people will have to begin traveling again in a normal fashion."

Huge delays in airport security lines present a greater threat to Las Vegas, Leupp believes.

"Increased security measures make it incredibly more inconvenient to engage in air travel," Leupp said. "Given Americans' impatience, I think that's the biggest issue here. I think it's most important to upgrade security measures, and make it easier for people to get in and out of airports (safely), so people don't feel like it's too much of a hassle to get onto airplanes to come here."

But not everyone's convinced a second terrorist attack wouldn't have dramatic consequences for the city.

"If there is further terrorist activity on U.S. soil, it's fair to say the Las Vegas market won't see a return to normalcy for probably even an extended period of time," Falcone said.