Those Star Casino Stock Performers May Face Trouble
Here’s the early line from Las Vegas: Gambler traffic overall is down for the year, particularly drive-in traffic from California. But the major casinos still are doing surprisingly good business, and that’s keeping their stocks up.
The nagging worry, though, is that the still-sliding California economy will pull Vegas and other Nevada gambling centers down with it. The casinos are heavily dependent on California visitors, who make up 30% to 35% of Las Vegas’ head count and 40% to 45% of Laughlin’s.
Concern about California’s hard recession “is something people haven’t been talking about, but probably should,” says James Murren, casino stock analyst at C. J. Lawrence Inc. in New York.
Most casino stocks are trading near their 52-week highs, bolstered by strong second-quarter earnings and expectations of an excellent summer quarter in Nevada, with at least some improvement in the weaker Atlantic City market. Companies such as Aztar (the Tropicana in Vegas and TropWorld in Atlantic City) and Showboat are much more dependent on Atlantic City than Nevada, while Mirage Resorts, Circus Circus and Hilton Hotels own only Nevada casinos.
So investors in those Nevada-only stocks have the most to lose if Californians give up gambling. “If California wasn’t there, you might as well turn out the lights in Nevada,” admits John Giovenco, head of Hilton’s gaming operations.
Auto and recreational-vehicle traffic between Southern California and Vegas has remained weak this year: The vehicle count was down 4.3% in May from a year ago, says the Las Vegas Convention Authority. Though air traffic into Vegas has risen, the total number of tourists visiting from all points was down 3% in the first five months of 1991 versus the same period in 1990.
Even so, the brunt of the tourist decline appears to be falling on the smaller, privately held casinos that lack marketing muscle. The major Nevada hotel/casinos have surprised Wall Street by keeping occupancy and profits growing nicely, even in a recessionary economy:
* Promus Cos., owner of the Holiday and Harrah properties in Nevada, earned 35 cents a share in the second quarter ended June 30, while Wall Street had expected only 20 cents.
The surprise has driven the stock to $23.75 now from $20 at the end of June. But most of Promus’ Nevada profit gains came from Tahoe and Reno casinos in the north of the state; operating income at its southern Nevada sites (Vegas and Laughlin, which depend greatly on the L.A. area) rose only 4% in the quarter.
* Analyst Jeffrey Logsdon at Seidler Amdec Securities in Los Angeles says both Circus Circus and Caesars World told him last week that they continue to enjoy “heavy traffic” at their Nevada casinos in July, continuing the spring trend.
* Hilton’s Giovenco says occupancy rates at the company’s four Nevada hotel/casinos ran at 77.7% through June 30, down just 1 point from a year earlier. July remains strong as well, he says.
Those healthy results for the major operators haven’t been without cost. Many of the big casinos have cut room rates, and they also admit that tourists overall are spending a little less than they would in a healthy economy.
Even so, through tight cost controls and in some cases better house winnings the big casinos are sporting excellent bottom-line profits this year.
Can they keep it up? They’d better: The stocks’ high prices today reflect the substantial earnings gains that Wall Street expects in the summer quarter (see chart).
Generally, analysts still believe that Circus Circus (the Excalibur and Circus Circus casinos) and Caesars World (Caesars Palace) are two particularly attractive stocks for the long run. But C. J. Lawrence’s Murren recently took Circus off his “buy” list. The stock has soared from $35.75 last year to $74.625 now. “I’ve been telling people to take profits,” he says.
That may be good advice for anyone who has big paper gains in casino stocks now. The risk is growing that California could be a much greater drag on Nevada casinos in the second half of the year, if the Golden State economy sinks further. At the stocks’ current prices, Wall Street won’t be forgiving if anything goes even slightly wrong.
Back to Neutrogena: L.A.-based skin- and hair-care products firm Neutrogena Corp. surprised Wall Street on Thursday with news that former executive Allan Kurtzman is returning to the company. Kurtzman was head of the firm’s consumer products division from 1981 to 1987. He left to head faltering cosmetics giant Max Factor, which he managed to put back on solid footing. Now, with Factor’s sellout to Procter & Gamble, the 64-year-old Kurtzman is coming back to Neutrogena to be president and chief operating officer.
The news sent the firm’s stock up 50 cents to $17.25. Prudential Securities analyst Andrew Shore calls Kurtzman’s return “the best piece of news out of Neutrogena in a year and a half.” The company’s earnings plunged in 1990 as competition in the personal products field mushroomed. Shore believes that Kurtzman will be crucial to returning Neutrogena’s competitive edge. Neither Kurtzman nor Neutrogena CEO Lloyd Cotsen were available for comment Thursday.
High-Stakes Stocks
Most casino stocks are trading near their highs for the year, as investors continue to bet on strong earnings in the current quarter--despite worries about California’s economic troubles and the potential effect on Nevada casinos.
52-week 3rd Q. Chng. vs. Stock high-low Thurs. EPS est.* year ago Aztar 7 1/4-2 3/8 6 3/8 0.19 +217% Caesars World 26 3/4-10 1/8 25 1/2 0.53 +71% Circus Circus 80 1/2-35 3/4 74 5/8 1.07 +24% Hilton 50 1/8-26 3/8 41 1/2 0.47 +4% Mirage 38 1/2-12 3/4 24 7/8 0.85 +215% Promus 27 3/8-8 7/8 23 3/4 0.75 +25% Showboat 10 3/4-3 9 7/8 0.32 +28%
* Earnings per share estimates for quarter ending Sept. 30, except for Circus Circus and Caesars (quarter ending July 31). Estimates from Zacks Investment Research.
All stocks trade on NYSE except Aztar (NASDAQ)
