Las Vegas Betting on New Family-Oriented Image

Shares of the big Las Vegas casino operators are hitting new highs, as Wall Street pumps up expectations for the three major resorts that will open on the Strip this fall.

By all accounts, the new mega-properties have the potential to complete Vegas’ rapid transition from Sin City to family-oriented destination. “Orlando with gambling,” some analysts now call it.

And while Vegas’ makeover carries significant risk to the casino firms--some experts question how lucrative the low-rolling family audience will be long-term--heavy advance bookings for the new resorts suggest the greater risk for now is in underestimating their profitability.

The $1-billion MGM Grand Hotel and Theme Park, largest of the three resorts and the biggest development in Vegas’ history, has already cut off 1994 bookings by tour wholesalers, hoping to keep a portion of its 5,009 rooms free for individual customers.

The MGM resort, brainchild of legendary investor Kirk Kerkorian, also has beaten its own deadlines and now plans to open Dec. 18--well ahead of the original March, 1994, target.

Reacting to the strong bookings and accelerated opening date, investors have bid MGM shares from $30 in June to $44.125 as of Friday.

Likewise, shares of Mirage Resorts and Circus Circus Enterprises have jumped in recent weeks, as Wall Street has focused on their new properties:

* On Oct. 15, Circus Circus will open Luxor, a 30-story, 2,526-room, pyramid-shaped hotel and casino across the southern end of the Strip from the MGM Grand. Built for $400 million, Luxor’s ancient-Egypt theme could make it the most alluring of the new properties, many analysts say.

“I think people are going to be stunned by the magnificence of the property,” says Jeff Logsdon, analyst at Seidler Securities in Los Angeles. “My guess is they’ve probably already sold out 75% of year-one rooms.”

Because it aims at a middle-market crowd, Luxor also is a departure for Circus, which until now has focused on low-rollers.

* On Oct. 27, Mirage will open the $450-million, 2,900-room Treasure Island hotel and casino adjacent to the company’s namesake resort, in what is now the center of the Strip. Pirate-themed Treasure Island is the creation of Mirage Chairman Stephen Wynn, who accelerated Vegas’ shift from adult gaming mecca to total-entertainment resort in November, 1989, with the opening of the Mirage.

Wynn brought white tigers and a 40-foot volcano to the Mirage because, as he has put it, “customers require more than a blackjack table or a slot machine” today.

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At the time, critics said Wynn had greatly overestimated Vegas’ resort appeal to the masses. But the Mirage quickly became the highest-grossing casino in Vegas. The company’s stock, at $10 early in 1988, now is at $51.25.

Mirage was followed by Circus’ medieval-themed, 4,000-room Excalibur hotel and casino in June, 1990, which likewise has drawn huge crowds and helped double Circus’ earnings since 1989.

Because the boom in Vegas tourism since 1989 has easily filled the glut of new hotel rooms, there is little concern this time that the three mega-resorts will drown the market--though they will add 10,435 rooms to the current 75,775.

Even in a town where hyperbole is part of the business, many analysts say Vegas’ tourist draw so far this year has surprised virtually everyone. The Las Vegas Vistors’ Bureau says hotel occupany averaged 86.1% in the first five months of 1993, up from 82.3% in the same period of 1992. The total visitor count through May was 9.4 million, up 5.5% from 1992.

The upshot, say gaming industry executives, is that the proliferation of gambling elsewhere in the country--on Mississippi riverboats, for example--isn’t hurting Las Vegas. If anything, smaller-scale gaming sites may just serve as “feeders” for Vegas, whetting first-time gamblers’ appetites.

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Still, some analysts wonder about the long-term profit potential in the middle-market, family-oriented gamblers that all three new mega-resorts want. What is unclear is whether they will leave enough on the gaming tables and in the slot machines--or whether they will be mostly sightseers in a city that now has plenty of good, clean stuff at which to gawk.

That issue may be most crucial for the MGM Grand, which will give Vegas its first casino-attached theme park (on 33 acres), built to resemble the backlot of a Hollywood studio, with rides, live shows and midway attractions. In the hotel, the “Wizard of Oz” will be a dominant theme.

Despite the obvious appeal for families--the kids go to the park while Mom and Dad gamble in the nation’s biggest casino--MGM CEO Robert Maxey insists that the company isn’t aiming to overrun Las Vegas with children. “Our theme park is not a kiddie-land,” he says. “We believe the adult market wants a destination resort.”

While that may be true, analysts say there’s no mistaking Vegas’ increasingly child-friendly attitude. And that worries some gaming-industry veterans who fear an eventual moral backlash.

By inviting kids, “They’re training the next generation of gamblers,” contends Marvin Roffman, a Philadelphia-based gaming analyst. “No matter what they tell you about the new hotels, that’s what it’s all about.”

On a business level, many competitors don’t believe the MGM Grand’s all-things-to-all-people approach can work long term. “I think it will be a success initially,” says one rival gaming executive. “But tell me a department store that’s doing well. You have to have a niche in this market.”

But a bet against MGM is a bet against the wily Kirk Kerkorian, who owns 73% of MGM’s stock and who has been wheeling and dealing in Las Vegas and on Wall Street for decades. “Kerkorian has an uncanny record of always making money for stockholders,” says Roffman.

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Assuming the new resorts open to rave reviews--and that bookings continue to boom--how much higher can the stocks go? History suggests the rallies can continue up to each resort’s opening day. At least that was the pattern with Mirage and Circus in 1989 and 1990.

After the openings, however, investors’ excitement is likely to cool, at least temporarily.

Long term, here’s how analysts size up potential winners and losers in the New Vegas:

* MGM, entirely dependent on its Vegas resort (it has almost no other assets), is expected to earn $1.47 a share in 1994, the first year of operation. At $44.125, that gives the stock an expensive price-to-earnings multiple of 30.

But Seidler’s Logsdon believes MGM can earn $2.50 a share in 1995. And he notes that the Vegas property is expected to be a prototype for new MGM resorts worldwide. “We have officially told the world that we intend to be a growth company,” Maxey says.

* Circus’ earnings are expected to jump 35% next year, thanks largely to Luxor. If analysts are right in their estimates, the stock’s price-to-earnings multiple now is a reasonable 18, based on 1994 results.

Many analysts say the big investment attraction in Circus is that it is tops in customer service for average gamblers, who have kept its five Nevada hotel/casinos constantly filled. “There’s no question they have extremely loyal customers who come back time after time,” says Roffman.

But with Luxor, Circus also risks cannibalizing business at its flagship Circus Circus casino, located at the other end of the Strip.

* Mirage may have the most potential to pleasantly surprise investors, some analysts say. At Treasure Island, “none of us knows what’s going on inside” in terms of special attractions, says one rival casino exec. “Wynn has downplayed expectations. But he has that grin on his face. . . .”

Mirage stock also may gain if the company spins off its downtown Golden Nugget property, as expected. That would remove a lot of debt from Mirage’s balance sheet, allowing it to pursue major gambling projects outside Nevada.

* Caesars World, Aztar, Promus and Hilton: All of these Vegas casino operators will have to contend with the “must-see” draw of the three new resorts, which could temporarily lure away customers. For that reason, the stocks could come under pressure this fall, analysts warn.

Hilton shares are already suffering. In 1990, it began offering financial incentives to gamblers to offset the draw of the Mirage and Excalibur. Vegas insiders fear that another round of discounting could be triggered this fall if bookings begin to fall off.

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But analysts also note that if the new resorts boost Las Vegas tourism overall, rivals may gain in the long run from the spillover effect. Aztar, for example, owns the Tropicana, which is directly across from the MGM Grand.

Caesars, meanwhile, could win if the high-roller crowd increasingly converges on Caesars Palace to escape middle-market crowds elsewhere.

Finally, many Wall Streeters like Promus (which own Harrah’s) best of all, despite its relatively low-key properties. Reason: “They have the most diversified base of any of the gaming companies,” says Roffman. Harrah’s operates Nevada casinos, Midwest riverboats, and recently was awarded development rights to a major new casino in New Orleans.

Gambling on Gamblers

Stocks of the big Las Vegas casino operators have surged in recent weeks on optimism about major new Vegas resort openings scheduled this fall. Here’s a look at the stocks, analysts’ earnings per share (EPS) estimates for the companies in 1993 and 1994, and the stocks’ price-to-earnings ratios based on estimated 1994 earnings.

52-week Fri. EPS estimates: P-E on Stock high/low close 1993 1994 Aztar Corp. $10 1/8-5 3/8 $7 3/4 $0.54 $0.70 Caesars World 50 7/8-30 1/2 45 1/2 3.31* 3.57 Circus Circus 43-27 1/2 41 1/8 1.68 2.26 Hilton Hotels 53 3/8-41 3/8 45 3/8 2.34 2.82 MGM Grand 44 7/8-15 7/8 44 1/8 -0.08 1.47 Mirage Resorts 52 1/4-23 1/4 51 1/4 2.05 3.09 Promus (Harrah’s) 70-15 5/8 65 1/8 1.18 1.98 Showboat 24 5/8-9 3/4 18 1/4 1.27 1.90 S&P; 500 index 456-403 456 25.97 29.02

Stock ’94 est. Aztar Corp. 11 Caesars World 13 Circus Circus 18 Hilton Hotels 16 MGM Grand 30 Mirage Resorts 17 Promus (Harrah’s) 33 Showboat 10 S&P; 500 index 16

* for fiscal year ended July 31; all stocks trade on NYSE.

Source: Zacks Investment Research