Casino Stocks Surge On Las Vegas Rebound
12:26 a.m. Feb 21, 1999 Eastern
By Sarah Tippit
LOS ANGELES (Reuters) - Investors in casino stocks, who have been bracing for a bloodbath on the Las Vegas Strip, are now seeing signs that industry expansion may be creating new demand rather than a glut.
The sector is rebounding this week after recent sluggishness as investors respond to analysts' reports citing a surge in airline passengers to Las Vegas, increases in room occupancy, and higher prices. The rebound may be driven by interest in the October opening of Mirage Inc.'s ultra luxury property, Bellagio, analysts said.
There were also signs that Asian high-rollers, whose numbers had dwindled due to the economic crisis at home, were back at the gaming tables of Las Vegas, at least for the Chinese New Year celebration this week.
And analysts said casino companies are expected to report earnings better than previously anticipated for the first quarter.
''We're finally having some positive data points on the industry, which we haven't had for along time ... as some indication the opening of the Bellagio had in fact spurred incremental demand for the market as opposed to'' pressuring existing properties, said Merrill Lynch analyst Naomi Talish.
Major casino stocks were up Friday, with MGM Grand Inc. up $2.13 at $35.88 and Harrah's Entertainment Inc. up $2.125 at $18.125 in afternoon trading on the New York Stock Exchange.
Circus Circus Enterprises Inc. was up $1.19 at $16.88, Mirage was $1.19 higher at $35.88, and Park Place Entertainment Inc., the gaming company spun off from Hilton Hotels Corp. in December, was up 62 cents at $8.
In January, air passenger volume to Las Vegas was up 9.1 percent, said Bear Stearns analyst Jason Ader.
Las Vegas also recently reported a 6.7 percent increase in total visitors, and increases in room occupancy and pricing. On average, revenue per available hotel room was up 10 percent to 15 percent over last year, Ader said.
In addition, the casino group has traditionally been an underperformer with undervalued stocks, analysts said, and it presents a good investment alternative to high-flying inflated stocks, such as those associated with the Internet.
'This is a group that is an underperformer and has been undervalued. Investors have become nervous about (investing in) groups that have performed well and are overvalued,'' said Dennis Forst, an analyst with McDonald & Co.
''We had a group with a historically low valuation. People are looking for cheap places to put their money,'' said Merrill Lynch's Talish, who upgraded Circus Circus to a ''long-term buy'' rating from ''accumulate.''
The outlook for the casino industry shows signs of improving, analysts said. A frenzy of mergers and acquisitions, renovations and new construction over the last few years has slowed, leaving more free cash flow, and therefore increased profit potential.
Analysts differed on whether they believed this streak of good luck would last through the end of 1999. Ader, while optimistic, warned that it would be hard to judge whether the opening of three new properties -- Circus Circus's Mandalay Bay on March 3; billionaire
Sheldon Adelson's The Venetian in early April; and Park Place's Paris in September -- would cause a glut of rooms that could dampen future earnings.
'Beyond May, it's hard to say,'' Ader said. Ladenburg Thalmann's Andrew Zarnett said he believed each of the new hotel openings would provide incremental increases in demand.
Continued success in Las Vegas will hinge upon whether airline traffic to the city increases, said Warren Marr, an analyst with Waterhouse Coopers.
Because the economy has been good recently, many flights have been diverted from Las Vegas to other destinations so airlines could fill their planes with high-paying business flyers as opposed to discount-shopping vacationers to Las Vegas.
''The short-term good news is that visitor count is up and air traffic is up. The problem is that it's not up ... to the level that is necessary to sustain addition of all the new supply that's going to come on line between now and then,''Marr said.
Long-haul flights from Europe and Asia are increasing, Marr said, but airlines need to increase non-stop flights from the East Coast. ''The (new upscale Las Vegas) customer doesn't want to change planes halfway across the country. They want direct service,'' Marr said.
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