Mandalay Resort Group's Warning Haunts Casino Sector

The luck ran out Wednesday on the casino industry's string of good third-quarter profit reports. And with it came investor worries that gambling's good times may be waning.

Reversing a trend, Mandalay Resort Group(MBG Quote), one of the industry's biggest players, said Tuesday it expected fiscal third-quarter earnings, due out later this month, would fall well short of the consensus estimate. Instead of an expected profit of 50 cents a share in the quarter ended Oct. 31, the company said the figure would be closer to last year's comparable figure of 37 cents.

The glum outlook sent sector shares down across the board. Mandalay lost $1, or 4.8%, to $19.81. Harrah's Entertainment(HET Quote) and MGM Mirage(MGG Quote) were the other major losers as shares of each company tumbled more than 5%.

Many analysts promptly cut future profit estimates for Mandalay and two of them, Jason Ader at Bear Stearns and Michael Happel at Morgan Stanley Dean Witter, reduced ratings on the stock. Ader's rating went from attractive to neutral and Happel's from outperform to neutral. (Bear and Morgan Stanley haven't done underwriting for the company.)

Mandalay said that while its casinos in the key Las Vegas market were doing well, business in secondary Nevada locations, including Reno, was behind last year's. It also reported that it was taking less money away from table games at the swank Mandalay Bay, one of its five casinos in Las Vegas.

Analysts generally are still upbeat about industry prospects into 2001, although investors have gotten more cautious because of worries over the economy. Shares of the major companies are down as much as 30% in the past month, although they remain up about 25% as a group for the year.

William Schmitt, analyst at CIBC World Markets, said he thinks it will get tougher for casino companies to match recent profits because Las Vegas in particular has been on such a roll. And the weakness in Mandalay Resort Group's secondary markets, Schmitt said, raises questions about whether high gas prices and the expansion of Indian casinos in California are cutting into vital traffic from Southern California to Nevada gambling meccas. (Schmitt rates Mandalay a hold. His firm hasn't done any recent underwriting for the company.)

"The growth of casino profits will be there unless the economy dies, but it will be slower growth," he said.