The Chips Are Down : Gaming Stocks Have Tumbled, and Vegas Is Bracing for New Competition

As contractors topped off the world’s largest casino complex on the Las Vegas Strip last month, gaming stocks on Wall Street tumbled down.

Shares in the gambling business fell about 25% earlier this year, after soaring in 1992. MGM Grand saw its stock fall 23% in the few weeks before topping off its 30-story Las Vegas hotel and casino in February.

The stocks of other leading casino operators, such as Circus Circus, Hilton and Promus, also foundered, and the initial public offering of one firm was scuttled.

The fallout in casino stocks has more to do with profit taking than concerns about the health of the gambling industry, analysts say. Despite making up some lost ground on Wall Street, investors remain cautious, however.

“We would delay making any new commitments on the group until the smokes clears a little bit,” said gambling industry analyst David S. Leibowitz at American Securities in New York.

The recent selloff in casino stocks and their dramatic rise last year coincided with the rapid spread of legalized gambling nationwide. Gamblers are already placing bets at casinos on American Indian reservations, Mississippi riverboats and Colorado gold rush towns. Gaming sites are under consideration in cities such as New Orleans, Chicago and Kansas City.

Meanwhile, construction cranes hover over the Las Vegas Strip, where three new gambling resorts will add more than 10,000 hotel rooms and several acres of casino floor space by 1994.

The MGM Grand Hotel, Casino & Theme Park, for example, will boast more than 5,000 hotel rooms, 170,000 square feet of casino space and a movie studio attraction when it opens early next year.

The builders of the gambling resorts have been encouraged by the success of two other massive Las Vegas casino properties--the Mirage and Excalibur--that have opened within the last 2 1/2 years. The Mirage, which is fronted by a volcano that erupts every 15 minutes, generated revenue of $660 million in its first year.

But such projects--aimed at broadening Las Vegas’ appeal to families and low rollers--will also intensify competition.

“The problem is that there are an awful lot of properties and a lot more coming on stream,” said Marvin B. Roffman, a partner in Roffman Miller Associates, a Philadelphia money management firm. “Some of the existing properties that are not run well and don’t stay competitive are going to have substantial problems.”

But Wall Street has, for the most part, ignored concerns about overbuilding in Las Vegas and the threat posed by gambling establishments outside of Nevada. The combined shares of major casino owners rose more than 50% last year, according to Tom Hantges, head of gaming research at Las Vegas-based USA Capital Management Group.

Even more impressive, however, was the performance of new gambling stocks.

Casino Magic, which owns a casino on a floating barge, opened at $5 a share in October and soon soared above $25.

“There was almost a frenzy in this group,” Roffman said.

But the casino group’s lucky streak began to fade this year as profit takers emerged, some leading casino executives--such as the president of Circus Circus--resigned, and concerns about Las Vegas casinos received press coverage. Casino stocks were also jolted by rumors of a federal gambling tax and efforts to expand, and later ban, gambling on Arizona Indian reservations.

“There was a realization by the market that it had gotten too far ahead of itself and there was some profit taking,” said Henry Gluck, chairman of Beverly Hills-based Caesars World.

The decline forced Casinos USA, an operator of casinos in Colorado and South Dakota, to postpone its initial public offering late last month. Argosy Gaming plunged from $19 to $15.75 a few days after its public debut.

After rising so strongly last year, many investors believed that casino stocks were due for a fall. “We thought they were overpriced,” said Roffman, who sold off his casino holdings and took his profits in January.

As for Las Vegas, “there is no question that we are at risk,” said Bill Thompson, a professor of public administration at the University of Nevada at Las Vegas. “We have rivals. We just have to fight it out for the family market.”

Las Vegas casino operators are also hedging their bets by taking advantage of the nationwide gaming craze. Caesars World, for example, is involved in major casino projects in New Orleans and near Palm Springs. Hilton is working on floating casinos in Kansas City and New Orleans. Mirage Resorts has sought to build a casino in New England.

“The big players are going to share in the growth of gaming because of their expertise and because of the fact that they are well capitalized,” said Hantges at USA Capital Management Group.