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Atlantic City, the Gaming Industry's Garden Spot

At least one analyst thinks stocks like Park Place will hold their own as air travel decreases.

We already know the World Trade Center disaster will hurt the gaming industry. But geography could easily determine which stocks take the worst beating.

With the entire tourism business, from airlines to cruise ships to travel agents, suffering a deep downturn since last week's catastrophe, investors have been shying away from gaming stocks. But Jefferies & Co. analyst Lawrence Klatzkin says gaming outfits with significant local clienteles -- think casinos in Atlantic City -- may well retain a good bit of business.

Meanwhile, those in remote locales more dependent on air travel could take a disproportionate hit. That means investors should avoid companies whose business is far from the major metropolitan areas -- those with a major presence in Las Vegas or Reno, Nev., or Tunica or Biloxi, Miss.

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As evidence of Atlantic City's resilience, Klatzkin said a telephone survey of 12 Atlantic City casino-hotels last weekend indicated that all were fully booked. The hotels are also booked for next weekend, when the Miss America Pageant is scheduled to be held. Contrast this with the lodging industry's experience in major markets such as New York and Los Angeles, where more rooms are empty than not.

So what's the best way to play the Atlantic City market?

Klatzkin suggests investing in companies such as



, which derives 63% of its earnings before interest, taxes, depreciation and amortization, or EBITDA, from its Atlantic City facilities;

Park Place Entertainment


, which derives 35% of EBITDA from the Atlantic City market; and

Harrah's Entertainment


, which gets 27%.

Other good local gaming plays include

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Argosy Gaming






Hollywood Casino



MTR Gaming


. (Jefferies has had a banking or advisory relationship with Argosy Gaming and Harrah's in the past three years.)

Whither Dantana?

Meanwhile, companies with operations in less well-populated areas such as Las Vegas or Mississippi could suffer, the analyst says. They include

MGM Mirage



Mandalay Bay


, both of which have seen their shares fall by more than one-third this week.

According to this line of thinking, the company with the biggest downside potential might be

Sun International


, which derives 97% of its EBITDA from its Paradise Island property in the Bahamas. Travel statistics suggest that about 36% of all tourists come to the Bahamas by airplane. The rest typically come by cruise ship. And with both of those industries experiencing a significant decline in bookings, the sentiment is that Sun could be in big trouble.

In short, the gaming industry is fraught with problems. But over the long run, demographics suggest that the industry will be just fine. The caveat: There will probably be a better entry point for many of the above-mentioned companies somewhere down the road.

In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback.