Casino index off 5 percent

Earnings warnings led to tumble

January 11, 2003 - Gaming stocks this week lost more than $1.5 billion in market value, with the Dow Jones casino index closing the week at 230, down 5 percent.

Fundamentally, the gaming industry finally took a serious hit from the ongoing economic slump and eroding stock market, with higher stakes casino players staying away and those who do come wagering less.

Early Wednesday, the gaming stock index dropped from 240 to 217, down 10 percent, following preannouncements by Mandalay Resort Group and MGM Mirage that their fourth-quarter earnings would fall short of earlier estimates.

And analysts said the worst may be yet to come because the earnings shortfalls were caused by ongoing weakness in the U.S. economy and its continued impact on domestic table gaming.

Casino stocks started the week at a total capitalized value of $30 billion, initially lost $3 billion in value after the earnings announcements, and then recovered modestly, analysts said.

"We believe that the economy and a weak Wall Street are finally having a real impact on the level of gaming volumes on the Strip," said Joe Greff, gaming analyst for Fulcrum Global Partners, an independent Wall Street investment research firm.

Based on rapidly deteriorating casino business and the earnings preannouncements, J.P. Morgan Securities Inc. and other Wall Street investment houses Wednesday downgraded the stock ratings of Harrah's Entertainment Inc., MGM Mirage and Park Place Entertainment Corp. and Aztar Corp., owner of the Tropicana in Las Vegas. J.P. Morgan maintained its neutral rating on Mandalay Resort Group.

"Las Vegas Strip domestic table play is very weak and, given the current state of the economy and volatility in the equity markets, it is likely to stay that way," Greff said. "Moreover, we don't believe that domestic table game weakness is limited to just the December holidays on the Strip."

Warning that Mandalay Resort Group and MGM Mirage may become "show me" stocks, he said the performance of Las Vegas-centric gaming stocks cannot be expected to improve until positive market results have been demonstrated.

Well-founded market predictions in general, however, may not be possible until the next meaningful Strip gaming "data point," which is probably the Super Bowl weekend, analysts said.

And then, even if industry performance is improved, UBS Warburg analyst Robin Farley warned that "given the weak trends that were present in the Vegas market before 9-11, we only expect Las Vegas to recover to the weak trends prior to that time, rather than expecting much growth at this part of the Las Vegas cycle."

The two major players that dominate the Las Vegas market are experiencing the brunt of the business fall-off, while others that are diversified geographically across the country are not showing the same degree of shortfalls, said Applied Analysis spokesman Brian Gordon.

"Harrah's and Park Place both seem stable because of the performance of their assets in other parts of the country, he said.

Harrah's and Park Place Entertainment did not preannounce earnings shortfalls, although their stocks also were downgraded on the basis of the expected industry performance in 2003.

Bear, Stearns analysts said that comparatively stronger results from Harrah's properties in Atlantic City and its overall geographic diversification may have helped mute what may have otherwise been greater downside risk to the company's fourth-quarter results.

Furthermore, in Las Vegas the company is relatively less dependent on the high-end table game business than Mandalay or MGM, they said.

Station Casinos, analysts said, is also an exception to the current market difficulties because it is "focused on relatively more stable slot revenues which have been less sensitive to swings in the economy and Wall Street, and has little or no dependence on room rates and high-end table games," Greff said.

"While Station does derive the majority of its revenues from the Las Vegas locals' markets, its revenue growth is dependent on the population growth of Las Vegas rather than an improving gaming consumer, room rates or table hold," Greff said.

Also bucking the market trends, The Venetian on Thursday preannounced that it expects fourth-quarter 2002 adjusted cash flow to be in the range of $55 million to $59 million, higher than previous estimates of $49 million.

"Too much emphasis is being place on New Year's (and the performance of a few operators)," said Deutsche Bank Securities analyst Marc Falcone, citing the success of The Venetian in the fourth quarter.

Analysts said The Venetian has been able to increase revenue per available room more effectively than its competitors because of its successful convention and conference sales and the overall popularity of its high-end rooms with independent travelers.

High table games hold, room rates and revenue per available room also contributed to The Venetian's preannouncement of solid results, they said.

Part of the discrepancy between The Venetian's performance and other operators was largely due to the property's decision to not cut room rates to spur occupancy, possibly to preserve room-rate integrity in anticipation of its 1,000-room expansion this summer, analysts said.

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Article Copyright ©: R. Smith, Las Vegas Review-Journal