Friday, March 28, 1997 | 11:59 a.m.
INVESTMENT ANALYSTS play a pivotal role in securities pricing. In that respect, the gaming industries' public companies are no different than any other. A key issue, as one reads the analysts' changes in their investment opinions, centers around the objectivity of such views.
Thoughtful investors may have noted that they rarely read about an analyst's outright sell opinion. In this respect, the call by Bruce Turner, Salomon's gaming analyst, on Stratosphere's outlook was unusual. Shortly after the complex opened, he expressed his view that Stratosphere would end up a bankruptcy candidate and that he was making, with this call, no attempt to be "politically correct." The meaning? Turner knew well that, after such a call (even a correct one) he would be a less-than-welcome visitor for further in-depth sessions at Stratosphere. At least initially, the target company believed that bankruptcy was "not an option." As matters worked out, of course, Turner was correct.
The analysts' role in Wall Street is changing. Increasingly, they play a central role in snaring investment banking business. The Wall Street Journal recently treated this subject in a feature story. Michael Holland, a securities industry veteran, indicated "the primary function of research analysts at top investment banking houses is to promote the firm's investment banking product." This being the case, thoughtful investors may question whether the analyst's primary goal is the providing of sound opinion or the ramping up of the firm's investment banking business. If the latter, then many of such opinions may be, to say the least, suspect.
As an example, Turner recently downgraded Circus Circus as he reduced the current fiscal year's earnings estimate to $1.50 per share. He was joined by a few other prominent gaming analysts. Jason Ader, Bear, Stearns, however, reiterated his long-term buy. It is difficult to reconcile their respective, conflicting views. Accordingly, investors in the gaming sector may wish to arrive at their own conclusions in determining which, if any, of gaming public companies they desire to own. In this regard, bear in mind Peter Lynch's Principle No. 4 from his best-seller "Beating the Street" -- "If You Like the Store, Chances Are You'll Love the Stock."
Acres Gaming is the latest of gaming common stock horror stories. It reported this week that it expects an operating loss for the third quarter ending March 31, 1997 and also anticipates that revenue in the fourth quarter will be below expectations. Gaming analysts' consensus earnings were $0.11 per share and $0.18 per share respectively for the two quarters. The shares, this past Wednesday, declined to below 5, a loss of about 35 percent from the prior close, and off some 75 percent from the year's high.
Simply put, there are just too many of these gaming stock horror stories. They have become the rule more than the exception. It is not difficult to understand that investor confidence in gaming issues, particularly the smaller of such, will require years, if ever, to return. Note the table of selected supplier issues (the operators are every bit as bad). Of the 10 companies, four stocks have declined only about one-fourth in value while six have lost more than one-half of their value and, of these, two have declined by more than three-fourths.
The point is, of course, that development stage companies, that is, those without established levels of revenue and cash flow, may turn into disastrous investments as such companies fail to deliver on the market's and shareholder expectations.
archive
