Casino earnings likely to show recovery

David Strow

Friday, April 5, 2002 | 11:04 a.m.

April could provide some of the strongest evidence yet of recovery on the Las Vegas Strip, as gaming's largest companies prepare to report first quarter results to investors.

The first quarter ended Sunday. Starting in two weeks, Park Place Entertainment Corp., MGM MIRAGE, Harrah's Entertainment Inc., Station Casinos Inc. and Boyd Gaming Corp. will all report their results.

And while no one's expecting growth, the consensus is that earnings will be coming in ahead of estimates -- an encouraging sign for a city trying to regain its footing after Sept. 11.

"It depends on your definition of strong," said Dennis Forst, gaming analyst with McDonald Investments. "I think business was well better than what anyone would have imagined three or four months ago. I think this is going to be a good quarter."

The Strip's big operators will have another advantage. Just a few months ago, when Las Vegas was still feeling severe effects from 9-11, casino operators told analysts to lower their estimates. That will make it far easier for casino operators to beat expectations for the quarter, something many are expecting.

"People cut their numbers for 2002 quite a lot after Sept. 11," said Jason Ader, gaming analyst with Bear Stearns. "Expectations have been set very low."

The most recent hard data available for the Strip's performance is for January. Those numbers seemed to back up the pessimistic expectations.

For three straight months, Nevada's gaming win had fallen by 10 percent or more. In January the decline hit rock-bottom, when the state's gaming win plunged 15 percent. On the Strip, win was down 24 percent -- the worst one-month decline in 19 years.

Visitor numbers also remained soft. In January, the city's visitor count stood at 2.67 million, off 5 percent from January 2001.

Then came February, and a one-two punch that brought Las Vegas back to life -- the Super Bowl and Chinese New Year.

"That was the 'Hey, we're back' weekend," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "Ever since then, things have been relatively strong."

Moreover, Zarnett believes the visitors that are coming back are the higher-spending travelers. In late 2001, the Strip's casinos relied heavily on drive-in travelers, who typically spent less money.

"I believe the mix (of visitors) is now pretty similar to that we saw prior to Sept. 11," Zarnett said.

The Las Vegas Convention and Visitors Authority is seeing the same thing. Immediately following Sept. 11, the LVCVA yanked a national ad campaign and replaced it with a campaign focused on targeted drive-in and short-flight markets.

Now, with national interest in Las Vegas rebounding, "we've broadened our strategy back to more of a full national presence," LVCVA spokesman Rob Powers said.

Jim Murren, president and chief financial officer of MGM MIRAGE, has a number of theories on why Las Vegas recovered so rapidly in the last two months -- the value Las Vegas offers to travelers; the billions of dollars spent by Las Vegas casino companies on new properties and expansions over the last several years; the aggressive post-9-11 marketing campaign undertaken by the LVCVA and casino companies; and very strong convention business.

"The bottom line is, there's no city in the U.S. that has recovered as quickly and profoundly as Las Vegas," Murren said.

Over the last six months, Murren said, Las Vegas has successfully been pirating away convention business from other Southwestern cities, such as Phoenix, Anaheim, Calif., San Diego and Los Angeles. A reason, again, is the value of Las Vegas compared to other cities, Murren said.

"There's a lot of (convention) business to be had, and we're getting it," Murren said. "The weaker economy has helped us there."

Two companies -- Boyd and Station -- have already signaled they will beat analysts' expectations for the quarter. Station's earnings per share will be as much as 80 percent higher than initially expected, while Boyd's will come in as much as 67 percent ahead of estimates.

Evidence of a strong recovery in February and March is largely anecdotal at this point, but that isn't stopping analysts from raising their expectations for the quarter.

Citing room rate surveys that showed rates getting close to pre-9-11 levels, Merrill Lynch gaming analyst David Anders increased his first-quarter estimate for MGM MIRAGE by 34 percent -- and urged investors to snap up the stock in anticipation of a strong quarter. He also raised his estimate on Harrah's by 19 percent, citing in part expectations of a stronger performance at the Rio.

Joyce Minor, gaming analyst with Lehman Bros., raised estimates on MGM MIRAGE and Harrah's, and increased her price targets on both stocks -- MGM MIRAGE from $37 to $40, Harrah's from $47 to $50. Strength in Atlantic City and the midwest was part of the reason for the hikes, but so was "an increasingly positive tone out of Las Vegas."

"Our sense is that even our new estimates may be easily beaten," Minor wrote.

Ader, meanwhile, raised his estimates on eight gaming companies in all, including MGM MIRAGE, Park Place and Harrah's. MGM MIRAGE and Mandalay Resort Group in particular are perhaps in the best position to report strong quarters, Ader said. (Mandalay's quarter doesn't end until the end of April.)

Despite these expectations, many analysts are still warning investors to be careful before buying the stocks. The reason -- investors, expecting strong results, have been bidding up casino stocks to dizzying heights. That's been driven in part by strong performances by the Midwest casino markets, but also by expectations of a strong Las Vegas rebound.

So far this year, the star has been Boyd, up 114 percent so far this year, after two quarters came in well ahead of expectations. Station has been the next best performer, with a 43 percent increase, followed by Mandalay (up 34 percent), MGM MIRAGE (up 18 percent), Harrah's (up 16 percent) and Park Place (up 12 percent).

Interest in the sector has been so intense that all six companies now trade above their pre-Sept. 11 levels, even though Las Vegas business has not returned to pre-attack levels. Boyd is 139 percent ahead of its Sept. 10 close, followed by Harrah's (50 percent), Station (30 percent), Mandalay and MGM MIRAGE (21 percent each) and Park Place (3 percent).

By comparison, the S&P 500 index is down 2 percent on the year, and is up 3 percent from Sept. 10.

"Las Vegas continues to recover, but that is more than factored into the gaming stocks," wrote UBS Warburg analyst Robin Farley in a Monday research note to investors.

And Powers warned that it's premature to predict a full recovery at this point. February and March appeared strong, but Powers said casinos have been warning that April looks softer.

"We would caution against concluding from those two months (February and March) that we've fully recovered," Powers said. "Clearly we have not fully recovered."

Though the city is gaining "traction," Murren also sounded a cautious tone.

"I would say the trend is good, but it's still down year-over-year, and we're nowhere near ready to declare victory in terms of recovery," Murren said. "We are clearly not back, as an industry or a company, to where we were pre-9-11."

Still, there is optimism. Ader, for example, predicts a "phenomenally strong" summer for Las Vegas.

Many upper-end travelers like to travel overseas for their summer vacations, Ader notes, but many won't this year, because of continuing security concerns.

"They will travel domestically, and if that's the case, Las Vegas is incredibly well positioned to capture that business," Ader said.

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