Gaming analysts turn cautious after two pre-announcements

Jan 14, 2003 4:33 AM

Modest gaming revenue gains in November and pre-announcements of declining earnings by two major companies have caused concern among analysts who cover the gaming industry.

In November, Las Vegas Strip gaming revenues rose just 6% to $372.5 million during a period that offered easy comparisons since they were measured against a period when Las Vegas business had eased considerably following the terrorists attacks of Sept. 11, 2001.

If the revenues were matched against those of November, 2000, the shortfall was 6.6%.

This, wrote Jason Ader and his associates at Bear, Stearns & Co. in a recent research paper, "would indicate that fundamentals on the Las Vegas Strip are much weaker than initially anticipated, despite rebounding from post September 11 depressed levels."

Taking a closer look at the numbers, Ader found that the Strip properties "benefited from a comparatively high level of baccarat play, as baccarat drop increased 112.2% to $234.7 million. Furthermore, the 15.6% hold percentage recorded in November was 640 basis points higher than the abnormally low hold in November 2001. As a result, baccarat win increased significantly to $36.6 million."

The November report followed earnings pre-announcements by two of the major players on the Strip: MGM MIRAGE Inc. (MGG) and Mandalay Resort Group (MBG). MGM MIRAGE said it expected to report fourth quarter earnings per share of between $0.24 and $0.27 a share while the consensus of analysts had expected $0.43 a share.

Mandalay Resort cut its fourth quarter estimate "closer to $0.10," that the $0.20 per share previously expected.

In a commentary, Robin Farley, senior gaming analyst at UBS Warburg, said MBG attributed the shortfall to weak table play but she said she felt the lesser expectation was caused by "weak room trends given that poor luck in December was balanced out by good luck in November."

Farley also said that based on weak trends she expected Las Vegas to recover to the period prior to 9/11, which also had shown signs of weakening demands.

Separating his company from those announcing declines was Gary Loveman, who recently assumed the position of CEO at Harrah’s Entertainment Inc. (HET). He cited the company’s diversified business locations and said that business in December was good.

Also differing from the Las Vegas Strip view was Robert Stewart, spokesman for Park Place Entertainment Corp. (PPE) who said the company was offering "no change in guidance."

When questioned about International Game Technology (IGT), the world’s largest manufacturer of gaming devices, President Tom Baker remarked, "We don’t have comments to make" regarding the most recent fiscal quarter.

Maryland muddle

Once it appeared to be a good bet that Maryland lawmakers would permit the state’s racetracks to add video lottery machines to their gaming mix, then a flurry of proposals, some far different from what was initially suggested, began to surface.

Such things as adding little Ocean Downs, a trotting track on the seashore to the mix; increasing the number of gaming devices to as many as 40,000 total, or withholding licenses until African-American businessmen get involved, began to cloud proposed legislation.

All of which caused incoming Gov. Robert Ehrlich to put on the brakes to speculation. The governor’s spokeswoman said, "Our convictions are strong and our course is steady. Gov.-elect Ehrlich has every intention of bringing slots to Maryland." However, she added, he will limit the number of machines to 10,000 and the number of track participants to four: Laurel, Pimlico, Rosecroft and a new track under construction in Cumberland.

Internet ban

The Indiana Senate is again trying to ban Internet gambling, although the general view is that such activity is already illegal because of the federal Interstate Wire Act.

Legislation making both the online gamblers and the Internet provider subject to felony charges passed the Senate last year but the matter died in the House.

Author of the bill, Sen. David Ford said "Internet gambling is completely unregulated. It’s pretty insidious. It’s a very difficult problem to get your arms around."

Although the state attorney general admitted that the bill fails to provide the tools to combat the growing industry, he said, "Any time the legislature addresses a matter and declares something a crime, it becomes clearer to the public that that’s the case."


Now that the courts have ruled that Iowa owes three racetracks $112 million in tax refunds, the state is eyeing an increase in gaming tax as a way of generating the funds to pay the judgment.

A task force appointed by the governor has been looking into ways that would ease the state’s burden. A proposal by the Iowa Gaming Association to expand Iowa’s casino industry was rejected immediately.

Instead, the task force has come up with a couple of proposals that increase gaming taxes. One proposal would have casino taxes vary from 15% to 25% depending upon total gross gambling revenues. Another would have casino tax rates escalating from 20.1% to 32.5% of gross gambling revenues. There would be an exemption for the first 15% of table-game revenues as a percentage of total gross gambling revenues.

It was expected that the increase in gaming tax rates would raise an additional $35 million annually in casino taxes.

The Insider

Laughlin, Nev., casinos won $44.3 million last November, a decline of 1.8% from November 2001.

Monarch Casino & Resort Inc. (MCRI) has confirmed that it is comfortable with fourth quarter earnings per share guidance of $0.14. The company operates the Atlantic Casino Resort in Reno, Nev.

Harrah’s Entertainment Inc. (HET) has announced that it plans a $33.8 million project to upgrade the boardwalk side of the Showboat Hotel/Casino in Atlantic City. The project is scheduled for completion in October.

Scientific Games Corporation (SGMS) has received a contract for its subsidiary, Autotote, to provide racing services to the Poland Racing Organization. The contract was estimated to be worth $4 million.

GTECH Holdings Corporation (GTK) said it had received a two-year extension to its current contract with the Arizona Lottery.

Joseph Greff, chief gaming analyst for Fulcrum Global Partners, has begun coverage of Penn National Gaming Inc. (PENN) with a "buy" rating and a 12-month price target of $21.

Barrick Gaming Corporation has chosen investment banker Legg Mason as its financial agent in the acquisition of several casinos in Downtown Las Vegas.

DB Securities gaming analyst Marc Falcone has started coverage on three major gaming device manufacturers. They are IGT "buy," WMS Industries "WMS "hold," and Alliance Gaming (AGI) "hold."