Wall Street still loves Las Vegas

Sep 27, 2005 7:28 AM

The consensus among some of Wall Street’s top forecasters is that Las Vegas will continue to have smooth sailing unless a financial hurricane hits.

"The Las Vegas Strip market is fine," Joe Greff, marketing director for Bear Stearns told a large G2E audience in a State of the Industry session earlier this month.

"Investor interest is high in Vegas, which continues to be a growing recreational spend," Greff added. "Steve Wynn has been very good for the market, no matter what the figures or reports say. He and his Wynn Las Vegas have been unfairly punished by investors based on perception rather than performance."

Mark Falcone, managing director of global equities for Deutsche Bank, pointed out that Las Vegas is changing in paradigm.

"The city is in the midst of decreasing land and increasing growth," Falcone said. "We counted 15 new properties currently in the works. The value of an acre of land here goes for $15-to-$20 million. Harrah’s paid $200 million for Imperial Palace. It’s not necessarily the value of land, but getting the ROI (return on investment) for getting the most out of these projects."

While Las Vegas is a "buy" both short and long term, the news is not quite so rosy for New Orleans, the Mississippi Gulf Coast or Macao.

Even though Macao is the target of many casino developers, Wall Street’s concern is long-term capitalization and return on investment.

"Macao revenues grew 40 percent in 2004, but they are up just 15 percent in 2005," said Falcone. "Las Vegas Sands committed $5 billion to Macao and Wynn invested $1.1 billion. I think the latter contributed to the underperformance of Wynn’s stock. Macao is a region that you can’t fly back and forth to easily, which may also add to investor hesitance."

Most of the early questioning from moderator Frank Fahrenkopf, president of the American Gaming Association, focused on the devastation Hurricane Katrina unleashed upon the Gulf Coast.

"I think all of us are trying to assess what the long-term effects will be on the industry," said Richard Baldwin, senior vice president of Shuffle Master. "We have business interruption insurance in place there and will be working with our customers. Nobody is being billed at the present time."

Falcone said that Wall Street interest still remains high despite the impact of Katrina.

"There is a lot of uncertainty and Wall Street is trying to get a handle on interruption insurance," he said. "There is an information vacuum that makes economic assessment difficult."

Greff added that Mississippi may be more encouraging than New Orleans in the long term for temporary land based facilities, a fact Penn National executive Bill Clifford supported.

"We’re fortunate not to have property in New Orleans," Clifford said. "Customers must have jobs and there are a lot of people not working. Fortunately, insurance companies have been fairly agreeable to getting cash flows started."

Penn National, which recently merged with Argosy to become the third largest casino marketer behind leader Harrah’s and MGM-Mirage, is waiting for licensing approval to begin investing in slots across its home state of Pennsylvania.

"Right now we are concerned with investing a tremendous amount of capital over temporary licensing," Baldwin said. "We expect to have a conditional license at the end of October and expect the awarding of full licenses between January 1 and March 31 next year. It would then take a year to finalize our eight sites."

The Harrah’s merger has benefited manufacturers such as Shuffle Master, according to Baldwin.

"Our products bring value to operators," he said. "I think we will continue to see more consolidation in order to keep up with the accelerated business."