Gaming analysts bullish on Vegas

By Liz Benston

Wednesday, Sept. 18, 2002 | 10:59 a.m.

Wall Street analysts remain bullish on Las Vegas in spite of terrorist attacks that devastated tourism in the short run and a longer-term recession that has threatened many sectors of the economy.

Casino industry analysts appeared on a panel at the Global Gaming Expo conference in Las Vegas Tuesday, a year from the day the financial markets opened after the terrorism of Sept. 11.

"Las Vegas has surprised us the most. We expected it to be down 6 to 7 percent more than it is," Harry Curtis, an analyst for J.P. Morgan, said. Visitors to Las Vegas are only down about 2 percent from a year ago, he said.

Las Vegas has broadened its customer appeal and increased its convention business, both of which have helped sustain the market during tough times, he said.

Analysts also credited the entire industry for weathering a broader stock market decline and avoiding the kind of corporate accounting scandals that have triggered recent market turbulence.

"We have a cleaner industry. It's highly regulated," said John Mulkey, a bond analyst with Bear, Stearns & Co.

Investors feel comforted by the fact that casinos must report their revenues to the state, added Merrill Lynch analyst David Anders.

"Investors have become disillusioned with the high-tech industry" and have returned to "old economy" stocks, including gaming companies, he said.

Casino gambling is becoming a more accepted form of entertainment, analysts said.

"Clearly gaming is a growth industry," Marc Falcone of Deutsche Bank Securities said.

Gaming as a percentage of total entertainment spending has grown from just over 9 percent several years ago to about 18 percent today, he said. That growth stems from the expansion and acceptance of gaming nationwide, he added.

While business in Las Vegas plummeted after Sept. 11 last year, the Midwest riverboat casino market held steady, a sign of the industry's resilience during tough times, analysts said. Some gamblers, they said, chose to stay closer to home and spend less.

"People go where it's convenient," Larry Klatzkin of Jefferies & Co. said. Losing $40 to $50 per gambling trip is an entertainment choice that's "no different than dinner and a movie with your family," he added.

Regulars may later "move up" to higher-end resort destinations, he said.

Expansion opportunities are at hand, panel members said, despite recent tax hikes that have hampered growth in some states.

Missouri and Iowa present the greatest potential risks for increased taxes next year, said UBS Warburg analyst Robin Farley.

Analysts identified Pennsylvania, Kentucky, Nebraska and Ohio as potential new or expanded markets, given a variety of factors including budget deficits, favorable political climates and existing gambling facilities.

Adding slot machines at racetracks presents a less politically charged growth opportunity, they said.

States with budget problems are liklier to approve of slots at racetracks, rather than permit new casinos, because racetracks have long offered gambling to locals in their communities, Curtis said.

Analysts closed the session with a discussion of the $1 billion Borgata, a luxury hotel-casino in Atlantic City that will mark that city's first new development in over a decade.

Some were more bullish than others about the hotel's prospects. Curtis said he expects the property to produce cash flow of about $175 million in the first 12 months, while Klatzkin disputed that figure.

"The first year is a challenge," Klatzkin said. New casinos -- even popular properties such as Bellagio and The Venetian -- have typically produced low returns for the first six months to a year, he said. He also questioned Borgata operator Boyd Gaming Corp.'s decision to build about 2,000 rooms, fewer than would typically accompany a property of its size.

Curtis drew a parallel between the Borgata and the opening of The Mirage in Las Vegas, which marked the city's first "megaresort" and helped redefine it as an upscale destination.

"For the first six months it will be shoulder to shoulder" at the Borgata, he said. The property's massive expenditures will be offset by "extraordinary revenue growth."

Borgata may increase the length of stay for the average Atlantic City visitor, added bond analyst John Kempf of Goldman, Sachs & Co.

"There are customers in the New York area who would rather fly out to Las Vegas than go to Atlantic City," he said.

It might not boost other hotels, which appeal to a different clientele, however, Farley said.

"I don't know that more rooms drives demand," she said.

Other analysts said the far end of the Boardwalk, where Aztar Corp.'s newly expanded Tropicana is located, could be hurt the most by the Borgata.

Aggressive promotions by other casinos, as well as the possibility of expanded gaming in neighboring states, also could cut into the market's potential, Falcone said.