Legal Gambling Improves Odds on Gaming Investing

His old man may be doing the proverbial grave-spin, but Chicago Mayor Richard M. Daley has seen the future, and it is . . . a $2-billion Windy City casino complex.

Who knows if it’ll ever be built, and who cares? For investors, the real significance of the Chicago casino plan floated this week is what it says about the growing acceptance of gambling as “wholesome” entertainment--and which public companies could benefit from that trend.

It wasn’t long ago that the only family you’d expect to see in a casino was the Corleone clan. In the last three years, the Las Vegas fun-meisters have changed that forever with their circuses, medieval castles and live volcanoes. Vegas is now an all-ages experience--or at least, that’s how parents can justify dragging the kids along.

More important, legalized gambling is blossoming in many forms across the nation. Of course, stories have been written since the late-1970s about an alleged “explosion” in gaming. Truth is, like so many anticipated revolutions, this one has been more of an evolution. But it is happening, and in fact it is accelerating.

The stock market sees it--which is why shares of Reno-based International Game Technology, the major producer of slot machines and other electronic games, have rocketed to $32.375 now from $2.25 in 1990; and why IGT’s competitor in the video-lottery market, WMS Industries in Chicago, has soared to $22.25 a share from $5 a year ago.

The last two years have brought casinos to Deadwood, S.D., and three Colorado towns; riverboat gambling on the Mississippi; approval for video lottery terminals (essentially, electronic card-game machines placed in bars) in Oregon and Louisiana, and a surge in construction of bingo parlors and casinos on American Indian reservations throughout the West and Midwest.

The catalyst for all of these new venues is the same: Cash-starved local governments, unable or unwilling to raise taxes on their populace, see legalized gambling as a sure-fire way to increase revenue. “Voluntary taxation,” they call it.

“Public policy in this country is undergoing a subtle, but enormously important, transformation,” says I. Nelson Rose, a Whittier College professor whose specialty is gambling law. “Government no longer merely allows some forms of gambling to exist--it now actively promotes all gambling.”

Gaming & Wagering Business magazine estimates that more than $290 billion was bet legally in the United States in 1990, with $227 billion of that wagered at casinos. No one knows exactly how many more billions were bet illegally.

Point is, if you’re a local lawmaker, and you figure you can bring even a few billion of the legal stuff into your state--and tax it heavily--the dollar signs begin to light up like the Vegas Strip.

Lotteries already typically provide 2% to 4% of state revenue in the 34 states that sponsor them, says William Bergman, executive director of the North American Assn. of State and Provincial Lotteries. But lotteries are small potatoes--about $21 billion in annual ticket sales. For the really big bucks, you need a casino, or at least casino games.

Enter Circus Circus Enterprises, Caesars World and Hilton Hotels and their joint-venture proposal for a Chicago gaming complex. The casino giants make their money in Nevada and Atlantic City, N.J. The biggest operators, including Circus and Caesars, grew tremendously in the 1980s, and their stocks rose accordingly. Circus, now at $43.375 a share, was a $7 stock in 1986.

What has held some investors back from the casino stocks in recent years, though, has been the fear that gambling’s growth outside Nevada and Atlantic City would cut into the casinos’ market.

The Chicago announcement, Hilton’s plan for a huge casino riverboat off New Orleans and Mirage Resorts’ talks with Indian tribes could begin to change Wall Street’s perception of the casino companies’ potential. It’s now clear that the Vegas giants won’t sit still while gaming expands elsewhere. They’re going after the customers, and they have the financial muscle and business savvy that states, cities and Indian tribes will need to make large-scale projects succeed.

If you believe that gambling’s status as legitimate entertainment can only mushroom in the ‘90s, it’s hard not to see good long-term value in shares of Circus, Caesars and Mirage.

There’s also a second avenue if you want to make an investment in gambling’s future: The handful of firms that make slot machines, video lottery terminals and other gaming machines.

This group is led by IGT, which accounts for 80% to 90% of the slot machines and other electronic games sold nationwide. IGT’s earnings growth has been explosive--and likewise the stock. At a price-to-earnings ratio (P-E) of 45 based on expected 1992 earnings per share, IGT sells for about three times the P-E of the average stock.

The latest excitement over IGT and rival WMS stems from expectations that many more states will legalize video lottery terminals--low-maintenance gaming that’s easy to regulate. Bergman, at the lottery association, says Kansas, Missouri and Pennsylvania are among the states considering the systems. They’re also spreading worldwide.

Is IGT overpriced at 45 times earnings? Not if gambling’s spread continues at the same pace. IGT’s sales totaled just $237 million last year. The firm’s CEO, Charles Mathewson, won’t guess what a “fair” price for his stock would be. But of the gambling market’s growth, he says, “I honestly don’t think we’ve seen even the tip of the iceberg.”

Come On, Snake Eyes!

Earnings trends, share prices and stock price-to-earnings (P-E) ratios for some of the leading casino companies and gaming-equipment makers.

Earnings per share: Stock 1992 Company 1991 1992E price P-E Intl. Game Tech. $0.52 $0.72 $32 3/8 45 WMS Industries* 0.47 0.80 22 1/4 28 Jackpot Enterprises* 0.25 0.50 13 5/8 27 Video Lottery Tech. 1.01 1.47 39 1/4 27 Hilton Hotels 1.76 2.22 48 22 Circus Circus 1.84 2.21 43 3/8 20 Aztar Corp. 0.05 0.35 6 1/2 19 Mirage Resorts 2.01 2.47 36 3/8 15 Caesars World* 2.09 3.09 39 13 * fiscal years end June or July

All stocks trade on NYSE except Video Lottery and Aztar (NASDAQ).

Earnings estimates are analysts’ consensus estimates compiled by Zacks Investment Research.