Gaming stocks drop on year-end results

By Liz Benston (contact)

Wednesday, Jan. 8, 2003 | 11:11 a.m.

Las Vegas casino stocks took a nosedive this morning after two major Strip operators that together control the most rooms on the Strip -- Mandalay Resort Group and MGM MIRAGE -- announced their earnings would be much lower than analysts' estimates.

The warnings come as experts begin to paint a more challenging economic outlook for Las Vegas Strip resorts, saying companies experienced weaker-than-expected visitor results for late December and the New Year's Eve holiday, which drove room rates down and may also indicate broader economic troubles.

"There's bodies here, but they're not spending the kind of money that they have in past years," said D. Taylor, secretary-treasurer of the Culinary Union, the region's largest union and the one that oversees thousands of housekeepers, waiters and other workers at Strip resorts.

Room rates are lower than in years past, a reflection of a troubled economy, he said.

Mandalay Resort Group's fourth quarter earnings will likely be close to 10 cents per share, less than half analysts' average estimate of 22 cents per share in the fourth quarter, the company warned investors on Tuesday. This morning, MGM MIRAGE said earnings would range from 24 to 27 cents per share as compared with analysts' average estimate of 43 cents.

Both companies blamed their shortfall on lower table game hold -- the amount won from gamblers over the period. Mandalay said it experienced a low win percentage on table games at its flagship Mandalay Bay Resort as well as lower-than-expected results at Las Vegas Strip resorts over the holidays. The company expects to release earnings for the fourth quarter ending Jan. 31 next month.

The weak U.S. economy is hurting "high-end" domestic customers," MGM MIRAGE added. The company expects to report results for the fourth quarter ended Dec. 31 on Jan. 28.

Local gaming stocks dipped on the news, with the biggest operators falling the hardest. The stock of MGM MIRAGE, which operates the most resort hotels on the Strip, fell more than 12 percent before noon trading today, to $28.60. Mandalay Resort Group shares declined more than 11 percent, to $27.26. Park Place Entertainment Corp. shares lost just under 10 percent of their value, at $7.57. And Harrah's Entertainment Inc. shares dropped more than 5 percent, to $36.50.

Shares of Boyd Gaming Corp., which operates neighborhood and downtown casinos off the Strip and the Stardust on the Strip, fell more than 7 percent, at $13.43. Station Casinos Inc., the region's largest locals' casino operator, saw its stock fall more than 7 percent, to $17.15.

Some analysts slashed ratings on Mandalay Resort Group and MGM MIRAGE, saying the warnings indicated weaker returns from high-end gamblers as well as disappointing room rates. Analysts also reduced the companies' earnings estimates on economic concerns.

Casino industry analyst Jason Ader said Mandalay's announcement is indicative of overall Strip results, "as economic pressure, international issues and midweek holidays combined to deal the Strip a tough hand."

Goldman Sachs gaming analyst Steven Kent said Mandalay's warning was "troubling" given executives' bullish outlook on the New Year's holiday just five weeks earlier.

"It appears that (Mandalay's) entire portfolio of Las Vegas casinos was unable to achieve the occupancy or (average daily rates) expected, leading to lower revenue, margins and operating leverage. Our outlook for gaming operators remains bearish," he wrote in a research note to investors issued today.

Some analysts remain cautious about the future performance of Mandalay Resort Group, which has been hurt by price wars among the lower end of the market. Luxor, Excalibur and Circus Circus, the second-, third- and fourth-largest hotels in Las Vegas and among the world's largest, offer rooms priced in the low- to mid-market range.

Some analysts said they don't expect other operators to be hurt as much as Mandalay has been by depressed room rates.

But UBS Warburg casino analyst Robin Farley said Mandalay's warning doesn't bode well for room demand at competitors MGM MIRAGE, Park Place and Harrah's.

"Given the weak trends that were present in the market even before 9-11, we only expect Las Vegas to recover to the weak trends prior to that time," Farley wrote in a research note to investors today.

Demand in the first part of January at the company's Strip resorts has been slow save for Mandalay Bay, Mandalay Resort Group said in a statement.

Strong performance at the luxury Mandalay Bay resort, the company's newest and highest revenue generator in Las Vegas, has boosted earnings in the past.

Some observers are bullish on future prospects, however, as Mandalay aims to lift room rates and occupancy levels with its 1.8 million square-foot Mandalay Bay Convention Center, one of the 10 largest convention centers in the country.

Events at the center also will help book rooms at Mandalay Bay and adjacent properties that are slower to fill mid-week, when tourists leave town and rates fall, experts say.

The $235 million center opened Monday on time and on budget and has booked 56 shows for the coming year, in line with expectations, the company said.

J.P. Morgan analyst Harry Curtis slashed ratings on MGM MIRAGE, Park Place and Harrah's from "overweight" to "neutral." Credit Lyonnais analyst Bryan Maher downgraded Mandalay from "buy" to "add" and Jeffrey Logsdon of Gerard Klauer Mattison & Co. lowered the company from "buy" to "neutral." CIBC World Markets analyst William Schmitt cut Mandalay's rating from "sector perform" to "sector underperform."

Casino analyst Lawrence Klatzkin of Jefferies & Co. also downgraded Aztar Corp. -- which owns the Tropicana in Las Vegas -- from "accumulate" to "hold."