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A Winning Hand in Las Vegas
Sin City's glitzy hotel-casino properties are thriving despite several challenges, and the odds are good they'll keep it up

BUSINESSWEEK
SEPTEMBER 3, 2002
STREET WISE
By Amy Tsao

Elvis was right: Viva, Las Vegas. Neither the slowdown in travel post-September 11 nor a slumping economy has curbed the influx of visitors to the glowing city in the desert. Though the travel industry continues to struggle, enough people are going to Sin City that shares in Vegas' hotel-casino operators are holding up relatively well.

So far this year, the benchmark Standard & Poor's 500-stock index is down 18% while S&P's gaming index is up 1.2%. Thanks to inexpensive airfares and cheap room rates, hotel-casino companies with properties in Vegas have performed the best of the gaming group. Mandalay Resort Group's (MBG ) stock at $29 is up 36%, while MGM Mirage (MGG ), at $35 is up 23%. Park Place Entertainment (PPE ), which owns Caesar's and Bally's, is down about 1% so far this year at $9. By comparison, Argosy (AGY ), which has no Vegas properties, is down 14%.

"VERY STRONG." Can the operators keep coming up with winning hands? Though earnings expectations for Corporate America remain hazy, the picture for gaming in Vegas is expected to stay positive -- with a crucial caveat. "On the assumption that the economy gets better, my feeling is that Las Vegas has a remarkable infrastructure that can serve a lot of people and should keep attracting big-convention business and leisure travel," says S&P's gaming analyst Tom Graves. Another factor that should help the companies' growth: Travelers are gradually losing their fear of flying.

Management at Mandalay is optimistic. "The first half of September will be challenging, but thereafter comparisons should prove very strong," Glenn Schaeffer, Mandalay's president, CFO, and treasurer, said during the company's earnings call on Aug. 28. "Over the next several years, room prices will climb between 6% and 8%." In the long term, he expects earning per share to grow at twice that rate.

Mandalay reported earnings of $29.3 million on $625.8 million in revenues in its second quarter ended July 31. Those figures are down about 4% and 2%, respectively but still aren't bad considering that Disney's (DIS ) theme-park profits declined 17% in its latest fiscal quarter. Disney also warned that theme-park revenues for fiscal fourth quarter would be soft. Disney shares hit a 52-week low of $13.48 on Aug. 8.

GAMBLERS WELCOME. Optimism can also be inferred from the ambitious expansion plans for Vegas properties -- albeit at a more moderate pace than in recent years. Mogul Steve Wynn wants to sell shares in his own hotel-casino company as early as September -- despite a mostly unreceptive initial public offering market. Wynn, who created the Bellagio and Mirage properties, wants to use at least part of the IPO money to build a massive $2.4 billion resort in Las Vegas called La Reve.

In the 1990s, hotel-casino moguls went on a building binge that included many resorts designed to be family-friendly. The upscale, sophisticated properties that have been built and planned recently suggest that the city is again focusing on gamblers and those who enjoy nightlife. However, the most successful hotel-casinos never truly abandoned that part of their market, according to Bryan Maher, analyst at Credit Lyonnaise Securities. "At the end of the day, these companies are in the business of gaming. And they want to attract gamers," he points out.

Indeed, Vegas' versatility and chameleon-like ability to change have proved to be a plus. "There's a continuing flow of newness -- theme hotels, new properties," says Keith Schwer, an economist at University of Nevada at Las Vegas. The city "has an ability to deal with the high end as well as average people who want to take an interesting vacation," he says.

A BIGGER BELLAGIO. Skeptics worry about the buildup, but Howard Lefkowitz, president of travel site Vegas.com, notes that Wall Street has many times wrongly predicted too much capacity. MGM Mirage recently announced a $375 million expansion plan for its Bellagio resort, set to begin in mid-2003. It will include a 925-room spa tower and an additional 60,000 square feet of meeting space. Mandalay will open a convention center on the grounds of its Mandalay Bay Resort next January.

Park Place has put off a planned $475 million expansion of its Caesar's Palace property, but it remains on track to complete a $95 million concert venue to be headlined by Celine Dion beginning next March.

True, Las Vegas hotels and convention centers haven't been immune to the nationwide slowdown in traffic. But Kevin Bagger, senior research analyst at the Las Vegas Convention & Visitors Authority, says traffic in the first half of 2002 is up 5.2% compared with year-ago levels. Bagger also notes that hotels in the area have devoted more resources to attracting smaller and midsize meetings.

NEW TAX HIT? More than 94,000 rooms on the Strip alone, several convention centers, pleasant weather, and countless entertainment options help make Las Vegas more attractive than other convention-hosting cities. "When you're up against Chicago and Orlando, businesses and associations looking to cut costs and still have a convention will naturally gravitate toward the price advantage that Vegas offers," Maher says.

To be sure, gaming companies have some potential obstacles. Several states are considering higher tax rates on gaming revenues. Newly implemented tax hikes in Illinois have already hurt Mandalay's most recent results by a 2 cents per share in the second quarter. However, worries over a similar move in Nevada have been overdone, says S&P's Graves. "My sense on Nevada is that the tax structure is likely to edge higher. It won't be a big leap because gaming is such a big employer and so important to the state."

Foreign travel to Vegas, particularly from Asia, has yet to recover to levels seen before last fall. And high-roller traffic declined 20% in June alone from a year earlier, figures Joseph Greff, an analyst with Fulcrum Global Partners. That's far better than the decline of 75% in fourth-quarter 2001 that the city saw compared with the same period in 2000.

Yet Las Vegas has proven itself a travel destination that isn't easily derailed. "When times are good, people want to go to Vegas. And when times are bad, people want to go to Vegas," Lefkowitz says. Ultimately, hotel-casino companies with a strong presence there could prove a smart bet for investors, especially if the economy improves later this year.

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