A Mixed Read for Bookseller; Odds Uncertain for Circus Circus

Barnes & Noble (BKS)

Mike: Let me tell you a little story, Jim.

Jim: Go ahead.

Mike: A month ago, I was in midtown Manhattan looking for a book, and I remembered that stretch of great bookstores on Fifth Avenue. So I went to see Scribner’s--and it was gone. Then I walked down the block to Doubleday, and it was gone. I walked across the street in search of B. Dalton and it was gone. And do you know what happened to all these bookstores? They all got swallowed up by Barnes & Noble, which closed them.

Jim: That’s correct.

Mike: So let’s start by asking, is that bad?

Jim: First, was there a Barnes & Noble store nearby?

Mike: Actually no, but there are several elsewhere in Manhattan, including its flagship store.

Jim: Well, to answer your question, no it’s not bad. Barnes & Noble is now the nation’s biggest bookseller because of those deals. But more than that, it’s done a masterful job of taking those assets and creating a very appealing and profitable chain of outlets.

Mike: Uh-oh, I hear a “but” coming.

Jim: Afraid so. Barnes & Noble has a nagging problem, and maybe you’ve heard of it: Amazon.com.

Mike: You know what I think of Amazon.com.

Jim: Too well, Mike. Amazon, of course, is the online bookseller whose shares became a bellwether of the Internet stock mania, even though Amazon’s operating fundamentals are still puny relative to, say, Barnes & Noble. But Amazon’s popularity was enough that Barnes & Noble had to roll out its own Internet sales site.

Mike: Barnesandnoble.com.

Jim: Right, but even that hasn’t been enough to cure what’s become a big perception problem that hangs over Barnes & Noble, namely that its 1,000 stores are becoming dinosaurs in the Internet age. And that must keep Len Riggio, Barnes & Noble’s savvy chief executive, up at night.

Mike: How so?

Jim: Because no matter how well he runs Barnes & Noble, every time he turns around, it’s like he’s getting kicked by Chan Ho Park. There will be some bit of flashy news about Amazon or online retailing that makes people queasy about owning Barnes & Noble’s stock. I mean, the shares are down 22% for the last 12 months, to $26 or so.

Mike: Let me jump in. No question Amazon is a problem, but it’s not a severe one and long term I think it’s irrelevant to Barnes & Noble. The huge success of Amazon’s stock is obscuring its lack of real, fundamental success in terms of its business model, and it’s obscuring the great success of Barnes & Noble. I like this company, and I’d buy the stock.

Jim: Long term, maybe. But right now, I can’t see Barnes & Noble escaping the lousy perception it’s under. Riggio is doing just about everything right, and Wall Street treats his company as though it makes buggy whips.

Mike: But perceptions change, and fundamentals are forever. In other words, I think the perception of Amazon as a juggernaut is going to change and has already started to change. And when the smoke clears, people will see that, in fact, Barnes & Noble’s fundamentals are much more solid and the stock will rally.

Jim: Yeah, but who knows when that will be?

Mike: In the meantime, Riggio has hedged his bets by taking a chunk of Barnesandnoble.com and selling it to the public. Its symbol is BNBN, and incidentally, it’s jointly owned by Barnes & Noble and Bertelsmann, the German media giant. Anyway, when it went public, the stock in its first day gained 27%. Now in the old days--you know, when there was no CNBC, only regular television--a 27% gain would have been stupendous. To me, it still is.

Jim: But today, it’s almost considered a failure.

Mike: Right, because it looked modest in comparison with many other Internet IPOs.

Jim: Even so, Barnesandnoble.com illustrates my point. Its current market value is $2.3 billion. Care to guess what the market value is for Barnes & Noble, with all of its stores--which are hard assets--and all of its earnings power? Just $1.8 billion.

Mike: That speaks to the current perceptions in the market you noted. But you know what? I don’t think it will prevail much longer. I mean, Amazon’s stock price has plunged nearly 60% from late April.

Jim: It hasn’t helped Barnes & Noble’s stock any.

Mike: It will. There’s going to be a big shift in attitude soon, which says that being online is great--God bless them--but you still need businesses with strong fundamentals, stores made of brick and mortar and the ability to deliver personal service to customers.

Jim: Maybe. But Barnes & Noble’s cause also wasn’t helped recently when it had to scrap its deal to buy Ingram Book Group, a big book wholesaler, because the Feds didn’t like the deal on antitrust grounds.

Mike: Yeah, but it was a brilliant maneuver by Riggio. And trust me, he’s not out of good ideas yet.

Circus Circus Enterprises (CIR)

Jim: This stock takes us back to one of your favorite places, Mike, the Las Vegas Strip.

Mike: You bet. As you know, Jim, I’ve always said that it’s pointless to ask whether Vegas is good or bad--just whether a given property is good or bad Vegas. The interesting thing about Circus Circus is that it spans good Vegas and bad Vegas.

Jim: Let me remind you that we reviewed Mirage Resorts, another major gaming company, almost a year ago. You liked it and I didn’t, and well, I won’t say anything else. Let’s see if you do better this time.

Mike: Now, let’s slice the ham a little thinner than that. Mirage, like all the other gaming stocks has of late had a pretty terrific run. Now I admit that if you bought it back when I called it, you would pretty much be breaking even today--which is at least a little better than the house odds on roulette. But the record shows that gaming stocks are coming back.

Jim: You’re absolutely right. Let’s go over a couple of reasons.

Mike: By the way, I think we should mention that Circus Circus is not going to be Circus Circus for very much longer. It’s about to change its name to Mandalay Resorts.

Jim: Certainly a more noble name, wouldn’t you say?

Mike: In fact, if you’re Circus Circus and you own casinos from the low end of the Strip, which is the Circus Circus hotel-casino, to the high end, which is the spanking new Mandalay Bay, which do you want to be associated with? Circus Circus and its spillover from Slots a Fun, or your newest and snazziest billion-dollar resort? Talk about a no-brainer. Of course, it’s a mark of the change in Circus Circus management that they actually understand it’s a no-brainer.

Jim: Right. Now Vegas went through a really rough period of two or three years, when traffic slumped and the Asian high rollers more or less disappeared, thanks to that region’s financial crisis.

Mike: It couldn’t have been worse timing. That happened just as a big surge in Vegas hotel capacity was coming, with the opening of Bellagio, Mandalay Bay, the Venetian and more. That cut into gaming stocks generally but particularly Circus because it’s heavily concentrated in Las Vegas.

Jim: The question in gaming is always whether growth in capacity will drive growth in visitorship, right?

Mike: Sure, and what happened was that Wall Street began to doubt the business would grow along with the hotel rooms. Those doubts have now dissipated like the bankroll of a player who hits on a hard 18. It’s beginning to look like Vegas is stronger than ever.

Jim: Even the airport statistics show there are more people going in and out of Vegas. The bottom line is that rather than cannibalizing the existing properties, all of these new places are actually sparking additional business.

Mike: So you like the stock?

Jim: Actually, no. I believe that this whole scenario is going to be very short-lived, and that this enormous amount of capacity is going to haunt these guys.

Mike: Really? Well, you’re betting on the red, and I’m betting on the black. I think the return of growth to Las Vegas is just beginning. Asia’s coming back, which is bread-and-butter to the Vegas market--especially the high end, which Circus Circus is now very well positioned to exploit.

Jim: Nope, this enormous flood of new rooms is going to outpace whatever increase in demand Las Vegas gets. I feel even more strongly about avoiding Circus because the stock is already up 90% so far this year, although it’s still relatively cheap at $21, or about 16 times earnings.

But what’s very telling is that the rally in gaming stocks ran plumb out of steam about a month ago. After the excitement wore off about the rebound in Las Vegas, these stocks completely stalled and everybody took their money off the table. I think it’s going to be really hard to get them restarted.

Mike: Let’s not forget, by the way, that Circus is about to open a casino in Detroit, which is bound to be big.

Jim: Fine, and Circus Circus isn’t going to flounder by any means. But its stock is going to lose its head of steam very quickly if it hasn’t already.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Barnes & Boble

Monday: $26.13

Circus Circus

Monday: $21.44