A tale of two cities continues to develop within the Las Vegas casino market.
stellar earnings Thursday show that high-end gaming remains strong at flashy Las Vegas strip casinos such as the Bellagio and Mandalay Bay.
wide quarterly profit miss on the same day highlights that some major weakness remains among casinos that cater to local residents in Vegas.
The so-called Las Vegas locals market, which lies several miles away outside the Strip, has been under pressure since Station opened its Red Rock Casino earlier this year.
Revenue looks great at this property, but margins have been under pressure due to high promotional spending and other start-up costs.
"We saw a chasm between the Strip, which was very strong, and the locals market, the off-Strip," says Dan Ahrens, a portfolio manager with the
( GACFX)Gaming & Casino Fund.
He adds that the latter "really may have a glut of capacity that needs to be absorbed still."
Red Rock is also cannibalizing demand from Station's nearby casinos, and hurting results at
, the other dominant player in the sector.
"The margins are under pressure at these properties as they're fighting for market share," says Matthew Jacob, an analyst with Majestic Research, which provides proprietary tracking data on the sector.
Meanwhile, consumers continue to flock to flashier part of Vegas.
MGM posted a 29% increase in operating income at its casinos on the Strip.
The results show that MGM is a great buy right now, says Ahrens, the portfolio manager.
MGM will open its Macau casino next year, but the stock trades at a large discount to other Macau plays.
At $44.75, MGM trades at 19 times its expected earnings next year.
, recently at $72.70, trades at 35 times 2007 estimates, and
Las Vegas Sands
, at $72.35, trades at 39.4 times next year's earnings.
For its part, Las Vegas Sands
surpassed analysts' profit targets.
Shares nonetheless fell over 5% Thursday.
Some pointed to the fact that the company's table-game revenue at its Venetian Resort on the Strip was down a bit, while slots were up -- signaling that more lower-end customers are visiting the property, possibly on the convention side.
"Expectations got a little ahead of themselves," says a hedge fund source who decided to unload the firm's position in Las Vegas Sands Thursday.
This person says he is positive on the fundamentals in gaming, but "people need to get more comfortable with the valuations" in the sector.
Right now, the gaming suppliers might be the safest bet for the sector, this source says.
This is something that Ahrens, of the Gaming & Casino fund, partially agrees with.
He says if investors are concerned about the valuations of LVS or the competitive market between Boyd and Station, then buying the three main casino equipment suppliers may be the best bet.
"There is new growth in Las Vegas, new markets are opening in places like Pennsylvania and Florida. And with these megacasinos being built in the Far East, that's built-in revenue for all these manufacturers," Ahrens says.
International Game Technology
, the largest slots supplier, to report very good earnings next week.
He also likes