Tax hike hits casino stock

By Liz Benston (contact)

Monday, June 3, 2002 | 11:14 a.m.

Gaming stocks fell broadly today on news that the Illinois General Assembly passed and sent to the governor over the weekend a proposal that would raise taxes on riverboat casinos to as much as 50 percent, making that state's gambling tax rate the highest in the nation.

The move late Sunday is expected to hit hardest the state's biggest casinos -- Mandalay Resort Group's Grand Victoria Elgin, Harrah's Entertainment Inc.'s Joliet, Argosy Gaming's Joliet Empress and Hollywood Casino's Aurora property.

The tax rates moved from 35 percent to 50 percent on annual revenues over $200 milion, while taxes on smaller revenue amounts inched up by at least 2 percentage points. The governor is expected to sign the bill into law within the next several weeks. An expected tradeoff -- allowing riverboat casinos to expand their operations -- didn't happen, analysts said. Still, some analysts were divided on their interpretation of the news.

"The proposal ended up being more negative than expected," said Jason Ader, a gaming analyst for Bear, Stearns & Co. Investors are likely to associate all riverboat casinos with a higher degree of risk, which will put pressure on stocks with non-Nevada operations, he said. "The Illinois tax decision underscores greater risk of some of these riverboat markets. Investing in Vegas is a safer and more stable bet for investors."

Ader today downgraded Harrah's Entertainment Inc. of Las Vegas from "buy' to"attractive." Harrah's only generates 14 percent of its cash flow from Illinois, but the company is still one of the leading riverboat operators in the country.

Ader also downgraded shares of Hollywood Casino from "buy" to "neutral." The company generates about 60 percent of its property cash flow from its Aurora facility. The increase could shave off about $20 million from a 2003 cash flow estimate of $133 million, or about 40 to 45 cents per share, he said.

Merrill Lynch analysts, however, today maintained buy ratings on Mandalay and Argosy and a strong buy rating on Harrah's. Analysts David Anders and Salvatore Di Pietro said they expect the companies to generate relatively high levels of cash flow.

Meanwhile, Indiana's legislature is leaning toward a more conservative increase in casino taxes, while relaxing gaming laws and permitting riverboat casinos to remain permanently docked. A more aggressive tax increase would call for investors to show caution, but dockside jurisdictions have historically led to increases in gaming revenues, the analysts said.

Shares of Harrah's fell by nearly 7 percent this morning, while Mandalay, which has 50 percent ownership of the Grand Victoria, saw its shares fall by more than 5 percent. Argosy Gaming took the biggest hit, falling 5.2 points, or 15.2 percent. Hollywood Casinos fell by more than 16 percent.

Other casino stocks also fell this morning. MGM MIRAGE dropped by nearly 5.5 percent, Park Place Entertainment was off 3 percent and Aztar Corp. fell by nearly than 11 percent.