At 1,100 feet high, Las Vegas' Stratosphere casino and tower is the tallest free-standing observation deck in the U.S. From that deck you can clearly see that

Stratosphere

(TOWV:Nasdaq) is no investment bargain.

But a growing chorus of casino analysts say the problems shouldn't cast a shadow over

Grand Casinos

(GND:NYSE), the tower's largest investor.

Indeed, with the stock market trading at an average of 21 times trailing year's earnings, investors should be jumping at Grand, which has fallen from 35 in June to 14 today, which is a price-to-earnings ratio of 14 and just seven times its expected 1997 profits, analysts argue. Grand operates seven casinos in Louisiana, Mississippi and Minnesota, which together produced more than $146 million in revenues in the third quarter of 1996, up from $2.4 million in all of 1991.

Instead of seeing those revenue figures and the company's decent valuation, investors are instead focused on Grand's 42% stake in Stratosphere, which has been snake-bitten since it opened unfinished in April 1996. The property's poor location, on the crime-ridden north end of the Las Vegas Strip, and a marketing strategy that emphasized the tower instead of the casino, left the Strat unable to meet its lofty cash flow targets. While a promotion offering "the best odds in Vegas" has drawn gamblers since it started in October, the company remained unable to pay the 14.25% interest on its $203 million in junk bonds.

So Stratosphere announced Monday that it expects to file for protection under Chapter 11 of the federal bankruptcy code later this month, in a complicated prenegotiated bankruptcy action that will lower the interest rates on the Strat's junk bonds to 11.25% and leave Grand in control of at least 65% of the Stratosphere's equity.

In return, Grand has agreed to forgive $50 million it's owed by Stratosphere and invest another $32 million in new cash in the company. Stratosphere's current shareholders will get nothing, except the right to contribute another $43 million to the property in return for the other 35% of its equity.

A majority of bondholders have OK'd the deal, which must still be approved by a federal bankruptcy judge and Nevada's casino regulators, Stratosphere says.

The $75 million in new cash Stratosphere is getting should enable the casino to complete an unfinished hotel tower, adding 1,000 more rooms to the 1,500-room property. That will help the Strat compete with the mega-resorts down the Strip.

Grand will take a $3- to $3.50-per-share charge to write off its previous investments in Stratosphere, but that's a small price to pay, analysts say, because the bankruptcy will end lawsuits from Stratosphere shareholders against both Stratosphere and Grand. Even if Grand never makes a cent from the Strat, Grand stock is badly undervalued, they argue.

Robert Evans, who follows Grand for

John G. Kinnard & Co.

in Minneapolis, says investors have "forgotten about the fact that Grand has seven other properties." He rates Grand a buy and says the company will make $2 per share in 1997. Kinnard has not done any recent underwriting for Grand.

Evans says Grand's largest property, a massive casino in Tunica, Miss., with more than 3,000 slot machines and 100 table games, easily dominates its competitors. While Evans acknowledges that the Tunica property is "much larger than it needs to be for the existing market," he says the casino will become more and more profitable as Grand turns it into a destination resort with a second hotel and a golf course.

Other analysts today reiterated their bullish stance on Grand's prospects.

Bear Stearns

analyst Jason Ader says Grand will earn $1.80 per share this year and calls the company "attractive," while

Dain Bosworth

analyst Mark Bartholomay predicts Grand will make $2 and rates it a buy. Neither firm has done any recent underwriting for the company.

By Alex Berenson

aberenson@thestreet.com