Gaming Stocks Take One on the Chin

If you are trying to handicap the gaming stocks, consider this: The recent decision by the Nevada Athletic Commission to forbid Mike Tyson to fight in Las Vegas dealt a significant blow to a sector that already had wobbly knees.

"The loss of this fight, which would be a big draw for the [MGM] and the city, is not positive," notes UBS Warburg analyst Robin Farley. "High-profile events such as boxing matches are a big draw for high rollers. However, it's not just high rollers that flock to Las Vegas -- even visitors that do not attend a particular event are drawn to the city to be able to wager on it."

Handspring Tish Williams and Tero Kuittinen AOL Time Warner Jim Seymour and Doug Kass Hotel Stocks Glenn Curtis and Chris Edmonds PC Demand Jim Cramer and Jim Seymour eBay Tim Arango and Arne Alsin

Indeed, a marquee event like Tyson-Lewis was exactly what the fight doctor ordered to help a limping Las Vegas recover. "There is a perception that fights involving Mike Tyson are among the biggest events in Vegas and are the strongest draw," Farley told clients earlier this week.

Indeed, that appears to be the case. In April 1997, the Tyson-Holyfield fight was postponed from May 3 to June 28. According to data collected by Farley, the impact of the May cancellation was dramatic. Sold-out properties dropped from 13 to 7, and the average room rate dropped from $226 to $122.

In addition, the fight would have helped gaming revenues, which are generally up during fight months. Specifically, for months with major fights over the past five years, baccarat wagers increased 4% on average, compared with an overall monthly decline of 2% during the same period.

Betting on the Come

Though nobody in Vegas was banking on Tyson to single-handedly bring Sin City back to life, his lack of class probably took a bite out of casino profits. And the lag in other major events isn't helping. For example, sources in Las Vegas say there are plenty of rooms available this Friday and Sunday night -- Super Bowl weekend -- compared with most Super Bowl weekends that are completely sold out.

One Vegas insider estimates that wagering on the game could be off as much as 10% from previous years, a result of both the impact of the general Vegas slowdown and the shift of many high rollers to offshore casinos that have less regulation and fewer reporting requirements on winnings.

And though MGM Mirage (MGG - commentary - Cramer's Take) beat reduced estimates Thursday, the stock is 15% richer than it was this time last year, despite revenue being off 13% from a year ago and profits slumping more than 58%. Also, the stock has more than doubled since its post-Sept. 11 lows, suggesting the current price is discounting future growth.

That is clearly the case with other casino companies. Take Park Place Entertainment (PPE - commentary - Cramer's Take): Though the company recently guided first-quarter earnings lower and resisted giving guidance for the balance of 2002, the stock trades at a higher multiple now than it did prior to Sept. 11.

"On Sept. 10, Park Place was trading at 11.7 times our 2002 expectations of 85 cents in EPS," noted Farley. "Today [it] is trading at 23.3 times our 2002 expectations and 18.5 times 2003 expectations. So Park Place, like some other large-cap operators, is trading on a higher multiple based on weaker fundamentals, even when valuing it on earnings a year further out."

While the optimism is encouraging, the current prices of MGM, Park Place, Harrah's (HET - commentary - Cramer's Take), Station Casinos (STN - commentary - Cramer's Take) and others suggest investors are betting on the come.

And as with the "come line" in craps, the gambler rarely wins.

To read Glenn's take on Gaming Stocks, click here.

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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.