Circus Circus Investors Are Not Amused
Has Wall Street’s once-favorite casino operator lost its hot hand?
That’s the question dogging Circus Circus Enterprises, the Nevada gaming giant that has helped lead Las Vegas’ transformation from Sin City to family resort.
Last Thursday, Circus’ stock plunged $2.25 a share after the company said the general manager of its new Luxor hotel/casino in Las Vegas, William J. Paulos, had quit. Friday, the stock eased further, losing 37.5 cents to $36.50.
While shares of Circus’ big gaming rivals--such as Caesars World, Hilton Hotels and Mirage Resorts--are hovering near all-time highs, Circus’ stock has tumbled 27% since peaking at $49.75 in October, just before it opened Luxor.
Circus investors appear spooked by two major concerns:
* A bad-mouthing of Luxor among Wall Streeters who have stayed there--and apparently by many other guests as well. Critics of the $400-million pyramid-shaped hotel say the elevators are inadequate, the service often slothlike and the layout too puzzling.
“It’s a gorgeous exterior, but they compromised on the interior,” said Michael Mueller, analyst at Montgomery Securities in San Francisco, in a common complaint.
Wall Street has also trashed Circus’ pink-domed “adventuresphere” amusement park that opened in August next to the company’s flagship Circus Circus casino, at the other end of Vegas’ Strip from Luxor. “That thing was almost a waste of $75 million,” one gaming industry analyst fumes.
* The continuing revolving door in Circus’ executive suite. Luxor’s Paulos is the fifth senior Circus officer to quit since 1991. A year ago, Glenn Schaeffer, Circus’ president and heir-apparent to iron-willed Chairman William G. Bennett, was forced out after challenging Bennett’s authority.
Wall Street’s fear is that Bennett, 69, is jeopardizing the company’s future by sending talented managers packing. Though institutional investors’ doubts about Bennett are tempered by their awe over the wealth he has created (Circus shares, adjusted for splits, have risen 15-fold since 1984), the loss of earnings momentum this year is eroding support for him.
According to analysts’ consensus estimate, Circus will earn $1.47 a share in the fiscal year ending next Monday, up just 4% from 1992 after growing an average 25% annually since 1987. Revenue is expected to hit a record $1 billion for fiscal 1993, fed by Luxor and by Circus’ other major hotel/casinos in Vegas, Reno and Laughlin, Nev.
In an interview Friday, Bennett, suffering from a sore throat but otherwise feisty, conceded that Circus has had problems with the Egyptian-themed Luxor, especially with the elevator-inclinators that travel the four corners of the 30-story, 2,526-room pyramid.
But he also expressed surprise--and concern--that criticism of the hotel has continued. “I understood we had this solved,” he said.
Service complaints in particular rankle Bennett, who has built Circus largely by fostering “great customer loyalty,” as he puts it. Told of one guest who waited 40 minutes for a beer in a Luxor restaurant on a recent Friday, Bennett admitted, “That stinks.”
Still, if guests don’t like Luxor, it isn’t yet apparent in the resort’s financial performance, Bennett said. The hotel’s occupancy has been topping 90%, with many sellouts. More important, the gaming take in Luxor’s opulent casino has apparently beaten projections.
“Financially, Luxor has been performing better than expected. We’re very happy with the bottom line,” Bennett said. In addition, he said, Luxor’s tourist allure has raised traffic at Circus’ 3 1/2-year-old, 4,000-room Medieval-themed Excalibur hotel/casino next door.
Down the Strip, at the company’s aging Circus Circus property, Bennett concedes that the addition of the Grand Slam Canyon “adventuresphere” in August didn’t provide the expected boost in family business. Critics say that, with just two major rides, the dome is a dud. “We’re working now on getting some additional things in there,” Bennett said without elaborating.
Wall Street--disappointed in the slowdown at the Circus Circus property and the weakness in Laughlin (hurt by Vegas’ must-see status, with Luxor, Treasure Island and the MGM Grand resorts all new)--had been counting on strength at Luxor and Excalibur to restore Circus’ earnings growth.
And indeed, Bennett said, “We thought we were going to have a very strong (fourth) quarter.”
Until, that was, last Monday’s deadly earthquake in Los Angeles.
Since then, “attendance (in Vegas) has dropped off enough that we are concerned about it,” Bennett said. Normally, about 15% of Circus’ business comes from the L.A. area, he said.
With the uncertainty, Bennett declined to say whether analysts’ earnings projections (the consensus is $2.02 per share for 1994) are still reasonable. If Los Angeles stays depressed, “I’ve got to figure out how to get more people from the Midwest in here,” he said.
What about the departure of Paulos, Luxor’s manager? Some Vegas insiders say Bennett had grown unhappy with Paulos, but whether that stemmed from complaints about Luxor isn’t clear.
In any case, the job Paulos took--chief operating officer of a new casino development in Australia--gives him a higher-profile post than he had at Circus.
Bennett scoffs at talk that he’s stifling executive development, driving good people out. “The real story is that our executives are good enough to get these kinds of deals” from rivals, he said. Investors needn’t worry about succession at Circus, he says. “We have a lot of good people here.”
Some of Circus’ investors give Bennett the benefit of the doubt. “He’s irascible, but he’s a genius, too,” said Jim Mair, research chief at Roger Engemann & Associates, a Pasadena money manager that owns 4.6 million Circus shares.
With the stock at $36.50 now, or 18 times estimated 1994 earnings, “I’m sort of a roaring bull on it,” Mair said. Hilton shares, by contrast, are priced at 25 times ’94 estimates; Mirage is at 21 times.
The near-term risk, however, is that Nevada-dependent Circus could be hurt worse than rivals by the Southland’s new misery.
And longer term, with Bennett’s plans to develop Circus casinos in new jurisdictions--including Canada, Australia and on the Mississippi River--the company’s need for talented managers will intensify.
If Luxor’s growing pains, Paulos’ exit and the misstep with Grand Slam Canyon are symptoms of a bigger problem in Circus’ executive suite, Wall Street may just be beginning to affix a lower valuation to this long-vaunted franchise.
