Booming Gambling Stocks May Face Dicey Future

Will the good times keep rolling in Vegas? Ever since new mega-resorts such as the Venetian and Bellagio began rising on the city's strip two years ago, critics have warned about overbuilding.

But in a town where too much is never enough, here comes the new Aladdin hotel-casino complex. Rising on the site of the original Aladdin on the strip, the $1.4 billion project includes a three-level casino and a mile-long shopping mall ready to welcome the first high rollers Thursday.

But the privately held resort, which will add 2,600 new rooms to an inventory that has already swollen by 12,000 in the past two years, may arrive just in time to catch the beginning of the end of the up cycle in the gambling business.

Aladdin Opens Thursday If Vegas gambling dives, the new casino may need a magic lamp

But so far, the doomsayers have been proved wrong. The city is still attracting enough tourists and gamblers to go around, even with the new Aladdin, analysts say. "Visitor trends have been quite strong," says PaineWebber analyst Robin Farley. Gambling revenue on the strip rose 9.5% in June to $353 million. For the year, revenue is up nearly 12% to almost $2.4 billion.

The boost has benefited most of the strip's large operators. The stocks of three companies that control 70% of the rooms on the strip, MGM Mirage (MGG Quote - Cramer on MGG - Stock Picks), Mandalay Resort Group (MBG Quote - Cramer on MBG - Stock Picks) and Park Place Entertainment (PPE Quote - Cramer on PPE - Stock Picks), are up an average of 28% in 2000, despite recent profit-taking.

Overall, the PaineWebber Gaming Index has risen about 22% for the year, while the S&P 500 is barely in the black.

Analysts think there are more good times immediately ahead for casino stocks. Beyond Las Vegas, the riverboat business is strong. More mergers, in addition to the recent MGM Grand-Mirage combination, are possible. Stock values are still relatively low. And cash flow is up, enabling operators to pay down debt and repurchase shares.

But some observers wonder if the industry is closing in on the end of a cycle, particularly if the economy runs out of gas. Although business held up fairly well during the last economic slump 10 years ago, jittery investors dumped casino shares.

Farley says the impact could be softened the next time around because the industry is more diverse. But a recession would still imperil stocks, she says.

Another threat to industry health is the expansion of Indian gambling in California.

Nevada-style slot machines and table games are legal at California Indian casinos. Growth in the California market could be harmful because the state's residents account for 30% of Las Vegas business.

There's also the specter of higher costs for Vegas operators. Nevada casinos currently pay a maximum state revenue tax of 6.25%, the lowest among 11 states with commercial casinos. A state senator is leading a move to raise it to 11.25%, but the industry is fighting it. The tax was last increased 11 years ago by 0.25%.

And then there's overexpansion. The Aladdin is the last big casino for at least three years, but at least five more major projects are in the works. They include gambling mogul Steve Wynn's plan for a project even flashier than the Bellagio, which his Mirage group opened in 1998. Looking for a comeback after selling Mirage to MGM Grand, Wynn is planning the tallest hotel casino on the strip.