Apparently it will take a lot more than a blowout quarter from one big casino operator to cheer up investors. Station Casinos ( STN) Tuesday reported third-quarter results
that smashed Wall Street estimates. But the company's failure to increase its existing fourth-quarter and 2006 guidance was greeted by selling. During a conference call, Station executives said the Las Vegas economy continues to fire on all cylinders. The company's third-quarter strength appears to back up some analysts' predictions that underlying gambling trends -- excluding the damage from recent hurricanes -- remain solid. Still, investors appear to be demanding some assurance about the future that will allow analysts to start lifting estimates again. "To shake the negative psychology, the market needs to see a solid third-quarter kill combined with a 2006 upward revision out of someone," says Steven Gart, gaming analyst at Langner & Co., a San Francisco-based equity research firm. Shareholders have been skittish about the impact of high gasoline prices on casino visitation, the long-term effect of recent Hurricanes Katrina and Rita on Gulf Coast markets and the possibility of a slowdown in Las Vegas room-rate growth.
"When the second-quarter results were lackluster across the board, that probably marked the peak of the valuation cycle," says Gart. "As soon as it was perceived that analysts could no longer lift estimates, the momentum guys started shorting." Gart doesn't own shares of companies he covers. His firm doesn't do business with companies in its research reports. The analyst does own some call options on Las Vegas Sands ( LVS), but he doesn't formally cover this company. The casino stocks have fallen 10% to 30% off their highs. Adding to the selling pressure were Hurricanes Katrina and Rita, which damaged or destroyed a number of casinos in Louisiana and Mississippi. Harrah's expects to take a third-quarter storm-related charge of at least $10 million when it reports the morning of Nov. 3.
Offsetting that bearish indicator is the 5% increase in gaming wins in the city last month, notes J.P. Morgan analyst Harry Curtis. Some gamblers are taking the train instead of driving, adds the analyst, whose firm does and seek to do business with companies covered in its research reports. Atlantic City's recent makeover, which is luring higher rollers, may also be offsetting whatever business might be lost from less-affluent customers who chose not to make the drive. Another worry is that room rates on the Las Vegas Strip -- a key demand gauge for the biggest U.S. gaming market -- are getting sluggish. Some analysts regularly call up Las Vegas hotels for quotes on future room rates. Among them is Bear Stearns' Joseph Greff, whose research shows rates unchanged or down for October and the first week of November. His latest survey, for the week ending Nov. 12, shows a pick-up, however. Room rates aren't a significant factor for Station, because its casinos appeal primarily to local residents who drive to them. For the next update on the third quarter, investors will wait for MGM Mirage ( MGM) to report on Oct. 26. Analysts expect earnings of 41 cents, up from 29 cents a year ago. Revenue will come in at $1.82 billion, according to the consensus. Las Vegas Sands is scheduled to release earnings after the market closes Nov. 2, and the average estimate is for a profit of 27 cents on $408 million in revenue. The company wasn't yet public in the third quarter of last year. A day later, Harrah's, the world's largest casino operator, will report before the market opens, and analysts expect it to report earnings of $1.02 vs. last year's $1.06. The revenue consensus is for $2.40 billion. Boyd Gaming follows after the close. Analysts see earnings rising to 52 cents from 38 cents a year ago, on revenue of $548.3 million. Wynn Resorts ( WYNN), which opened its flagship casino in Las Vegas in April, and Pinnacle Entertainment ( PNK), have yet to announce earnings dates. The former is expected to swing to a profit of 10 cents a share, vs. last year's loss of 26 cents and report revenue of $265.9 million. The profit consensus for Pinnacle is 11 cents, up from 7 cents last year.