Friday, May 16, 1997 | 11:59 a.m.
AS ANY INVESTOR can easily observe, the market for gaming stocks seems hardly interrelated to stock prices in general. Gaming stocks went off 40 percent from a peak of 334 in June 1996 to a trough of 191 on April 30, 1997 before rebounding a lively 14.6 percent to 219 in just five trading sessions. After the initial surge, the ensuing five trading sessions (through Wednesday, May 14) recorded little change.
The question: Is the long bear market in gaming over? What next?
Gaming stocks' shortcomings have been well documented in this column. In addition to excess competition in many regional markets which, in some cases, has been accompanied by excessive debt levels, Las Vegas' visitor and room price numbers are not what may have been hoped.
These factors, however, are so well documented in Wall Street and Main Street that they are no longer news. An old saying is: "Wall Street never discounts the same thing twice." I believe Wall Street's renewed enthusiasm for gaming stocks, however brief, is related to the following factors:
* The stock market in general is on a tear. It has just tacked on more than 10 percent in 20 trading sessions. Some say this is a top or a blow off but looking back in the Wall Street history book one notes that since 1970 on only seven occasions has the Dow gained 10 percent in 20 trading sessions.
In all but one the Dow continued to advance for ensuing three- and six-month periods. Thus history is on the side of the stock buyer. Moreover, new money is cascading into the professional investors' (if there is such a thing) mutual fund portfolios.
One of our gaming industry research counterparts in Wall Street notes that the short side of nearly anything is difficult as long as new money flows are so substantial. Thus, it may be that many portfolio managers are willing to buy selected gaming stocks, such as Mirage, Circus and MGM Grand, in the belief that better Las Vegas numbers are ahead.
* There is no shortage of gaming stock rumors. These include sale of the Desert Inn, which would add more liquid funds to ITT's treasury if it sought a major gaming industry purchase or a Pac Man defense (the hunter becomes the hunted) to Hilton's unwanted takeover bid. These rumors include, among others, purchase of Primadonna Resorts to gain ownership of 50 percent of the so highly successful New York-New York and speculation of an increase in MGM's credit line to permit a major corporate purchase.
Kirk Kerkorian, in a Wall Street Journal Abreast of the Market column, was said to be liquidating his position in Chrysler which, if he so desired, could be utilized in a multibillion dollar gaming purchase. All of the foregoing adds up to big bucks which may become available to finance some sort of gaming industry restructuring. Add to these speculative thoughts the perception that our major gaming entities appear reasonably priced in terms of Wall Street's 1998 estimated earnings per share forecasts.
I see two separate sets of gaming stock market action ahead.
For the secondary gaming operators enshrined in regional markets now characterized by overcapacity and excessive debt levels, there likely will be no early reprieve. With uncertain levels of earnings, most often the multiple or ratio often goes down in what is politely referred to in Wall Street as "multiple compression." The combination of these declining factors is called "stock disaster."
However, the major operating companies and the best of the suppliers, in my opinion, may have a fairly decent period ahead.
The primary casino-based destination resort operators are relatively inexpensive after gaming's comeuppance of the last year. More importantly, the better managed companies have somewhat of a semi-monopoly. Yes, they compete with one another but many secondary operators won't be building any more facilities. Let's remember we're talking about just a few core companies -- Mirage, MGM Grand, Circus, Hilton and ITT. Moreover, gaming's current question marks in Las Vegas concerning visitor volume, gaming win and hotel rates may make it more difficult to duplicate existing facilities. Over time, demand may fill whatever excess capacity may currently exist.
The supplier group, in my view, includes several companies with major financial strengths and above-average outlooks, i.e., International Game Technology and Anchor Gaming. Both stocks sell substantially below their year highs of $23 and $70 respectively. In short, I believe both IGT and SLOT have launched a new day in progressive systems which include game within a game concepts now so popular in stand alone versions developed by Anchor Gaming (Wheel of Gold and Totum Pole). Future progressive systems may feature more themed games such as Wheel of Fortune patterned after the successful game show of the same name.
I am thus inclined to conclude that thoughtful investors might do their stock shopping in the beaten-down supplier group.