The Passed Seven
by Paul Larson (MF Parlay)

MARKET CLOSE            3/19/97     3/28/97
Nasdaq Composite:       1249.29     1249.51 (+0.02%)
CBOE Gaming Index (GAX): 208.37      206.89 (-0.71%)
S&P 500 (SPX):           785.77      773.88 (-1.51%)

Chicago, IL (March 28, 1997) -- Don't say Mr. Irrational-Exuberance didn't warn you. As many were expecting, Alan Greenspan and the Federal Reserve Board decided to raise interest rates this week. The federal-funds rate was raised one quarter percent in what was termed a "pre-emptive strike" against inflation. The federal tightening was the first made in over two years, and many believe it may be the precursor to a series of rate hikes this year.

As I have said many times in the past, investors in the gaming sector simply cannot throw caution to the wind when considering the effect interest rates have on the industry. Gaming companies tend to be highly leveraged entities with long-term debt many times eclipsing market capitalizations. Increase the cost of borrowing for your next $800 million mega-resort or your $250 million hotel renovation and the prospect of these projects being completed diminishes. While a one quarter percent hike in one rate shouldn't really have much of an impact, it could be the start of a trend that would be significant. We Fools try not to predict interest rates and mass market movements, but one card in the interest rate game has been shown and it is entirely prudent to adjust your bets accordingly.

Speaking of highly leveraged entities, TRUMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %> announced this week that talks between the company and Colonial Capital, a California based REIT, had broken off. Colonial Capital was interested in purchasing half of the beleaguered Trump Castle in Atlantic City with the proceeds going towards adding a hotel tower and retheming the resort to a marina ambiance.

This isn't the first deal that has fallen through for Trump this past year. Several months ago similar talks concerning retheming the Castle with the Rank Organization, owners of the Hard Rock Cafe chain, also ended with no agreement made. Recently, RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> announced its intentions to withdraw from its planned unit at Trump's Taj Mahal. When the Rank talks broke off last fall, Trump's stock dropped over 20% in less than a week. The market was a little kinder to The Donald and his company this time around with the stock only dipping half a point on Thursday.

Beyond the Castle deal, Trump has been making waves on other fronts of late. The company announced that it had essentially bought back all of the shares approved under its stock repurchase plan in recent weeks. The company bought back 1.24 million shares at an average cost of $10.27, and has announced its probable intention to buy back even more shares. Are we seeing the board's confidence in the company's common stock or are we seeing the desperate measures being taken by a captain whose ship is in dire straits?

Trump also announced last week that it is delaying the 777-room, 40-story hotel tower that it had planned on adding to the Taj Mahal. In a letter to the New Jersey Casino Reinvestment Development Authority, the company cited the $330 million tunnel the state and MIRAGE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIR)") else Response.Write("(NYSE: MIR)") end if %> are negotiating to fund together as the reason for the Taj delay. Seems The Donald is a little upset that the state is subsidizing "Steve Wynn's driveway" to Mirage's proposed $2 billion resort in the marina district of the city... at least that's the reasoning for the delay he is giving in public. This Fool thinks the Taj hotel cancellation is more a business decision (read: lack of funds) than anything. Trump is already saddled with $1.7 billion in long-term debt and only has one tenth that in cash. In addition, other companies are expected to add significant new capacity to the New Jersey shore Trump currently dominates. Beyond Mirage, MGM GRAND (MYSE: MGG), BOYD GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BYD)") else Response.Write("(NYSE: BYD)") end if %>, CIRCUS CIRCUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %>, and HILTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %> have all publicly expressed interests in building new resorts in New Jersey. This says nothing of the impact additional tribal casinos and racetrack slots in the east will have on Atlantic City.

There are many that are predicting 1998 and beyond will be tougher on The Donald than the early 90's were. With the company having yearly EBITDA in the $150-200 million range and only 21 million shares outstanding (and shrinking), a small improvement in margins will disproportionately affect the common stock. Given the capital structure with the stock equity of approximately $200 million sitting on top of long-term debt of $1.7 billion, the common stock is more a derivative issue than anything. If promotional allowances and interest payments continue to eat up cash the stock could easily go to zero. Yes, Fool, zippo. Likewise, small improvement in operating results and the stock could have significant earnings and a corresponding higher stock price. Investors in Trump need to fasten their seatbelts. The stock is likely to have some dramatic moves in the future... but it is still unclear in which direction.

This week's disaster du jour without a doubt was ACRES GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AGAM)") else Response.Write("(Nasdaq: AGAM)") end if %>. The stock had been trading as high as $10 last week, but got chopped roughly in half this week to close at $4 3/8. The company announced shipments of its Concept III data collection and bonusing components to its partner and investor IGT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGT)") else Response.Write("(NYSE: IGT)") end if %> will be below expectations for the current quarter. Because of this, Acres expects to report a loss for the current quarter and has guided future earnings estimates southward. Essentially, the company is ramping up production of this highly anticipated product much slower than originally planned and hoped for. Whether the delay is simply a production problem or a problem more endemic to the company's products is up for debate. Clearly Wall Street is betting on the latter of the two scenarios, but Wall Street bets wrong all the time.

EUROPA CRUISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KRUZ)") else Response.Write("(Nasdaq: KRUZ)") end if %>, a penny stock which has been dominating the conversations of many a gaming stock investor of late, made an interesting announcement this week. The company said it expected net earnings of $600K in the current quarter versus a net loss of about $200K the company had in the same quarter last year. I'm sure more than a few math teachers roiled when they read this statement the company put out, "The net income... is expected to be approximately $600,000 as compared to a net loss... of ($201,341) during the same quarter of 1996, an increase of 400%." Regardless, the company's board continues to fight off a dissident group of shareholders who are hosting a nasty proxy battle.

SILICON GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SGIC)") else Response.Write("(Nasdaq: SGIC)") end if %> announced that it has reached final regulatory approval for its Odyssey slot machines in Nevada. The first machines will be available at various STATION CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STN)") else Response.Write("(NYSE: STN)") end if %> properties around Las Vegas in the coming weeks. The approval by the Nevada Gaming Commission marks the end of a lengthy development process in which Silicon spent $20 million developing the next generation machines. The machines use large, high-resolution video screens as opposed to the traditional three-reel slot machine. As one contributor to the Fool so eloquently put it, these machines are "way, way, way out there." Silicon's expectations on Wall Street are running extremely high since the company has a market capitalization of nearly $200 million and nary a dollar in trailing sales. Silicon is much like the hot draft pick in professional sports -- having high hopes and all-star talent, but no experience nor track record to draw upon. It will be interesting to watch this company in the coming months.

Another company also announced its nod of approval from the Nevada Gaming Commission this week. INNOVATIVE GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IGCA)") else Response.Write("(Nasdaq: IGCA)") end if %> received approval for its BJ Blitz and Lightning Strike Roulette games. IGCA had one of the more prominent displays at last week's IGBE conference and had probably some of the most talked about products of the show. These two games are essentially full-size automated video replicas of the popular table games. Few doubt that flesh and blood dealers are preferred by table games players rather than these "dealer-bots". However, the video versions of these games will certainly serve a niche, especially in markets that don't allow table games, such as many tribal casinos and international markets.

Now for this week's red ink summary...

Black Hawk Gaming (BHWK)       ($.01)
Colorado Gaming (CGME)          $.03
Europa Cruises (KRUZ)          ($.01) annual results
Greate Bay (GBY)              ($1.89)
Harveys (HVY)                   $.00
International Totalizer (ITSI) ($.11)   
Stuart Entertainment (STUA)    ($.13)
Video Lottery (VLTS)          ($1.38)

Good luck and have a Happy Easter!

Did you know. . .
That there are 20,000 hotel rooms within a block radius of the infamous "four corners" intersection on the Las Vegas strip?

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