The Passed Seven
by Paul Larson (MF Parlay)

MARKET CLOSE               4/10/97     4/18/97
S&P 500 (SPX):              758.34     766.34 (+1.05%)
Nasdaq Composite:          1235.77    1222.57 (-1.07%)
CBOE Gaming Index (GAX):    201.61     198.59 (-1.50%)

Chicago, IL (April 18, 1997) -- The Passed Seven is once again covering days numbering more than seven. Until we at Fool HQ can nail down a hard and fast schedule for all of our sector weekly updates, this update will be available on the weekends. I apologize for those who were looking for it yesterday only to find news a week stale.

The market continued its volatile, manic-depressive ways this week. While the Dow could not decide which side of a hundred point move it wanted to be on any given day, the Gaming Index held relatively stable in its bearish ways. The GAX was down another 1.5% this week without much volatility, but what's another point and half when you are already off over 40% from your highs? At one point this week, the Nasdaq and Dow were 10% off their highs and the media was all over it. Could you imagine the press if the Nasdaq were to fall 40% from its highs like the GAX has?

Extremely busy week this week as the earnings parade began in earnest. Without further shuffling, let's jump right in!

This week MIRAGE RESORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIR)") else Response.Write("(NYSE: MIR)") end if %> was not loved as much as it normally is when the company missed its earnings estimates by two pennies when it reported first quarter profits of $0.29 per share. The $0.29 also compared negatively to the $0.33 the company reported in the year-ago quarter. Construction-related impediments at the company's Las Vegas Golden Nugget resort, a continued weak Laughlin market, and reduced foot traffic at the Treasure Island due to the nearby Sands hotel destruction were all blamed for the earnings weakness.

Revenues at all four of the wholly owned company units had negative year ago comparisons. In addition, the company incurred a significant increase in interest expenses while the company is beefing up the liabilities side of the balance sheet to fund their construction at the huge Bellagio on the Las Vegas strip and Beau Rivage in Mississippi. On the bright side, the new Monte Carlo resort continued to perform above expectations and reported EBITDA of nearly $15 million in the quarter. Monte Carlo was undoubtedly helped by increased foot traffic due to the opening of the excessively popular New York, New York casino next door.

GRAND CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GND)") else Response.Write("(NYSE: GND)") end if %> also reported results that were below both the estimates and prior year numbers. The company reported earnings per share of $0.34 versus the $0.35 estimate and the $0.41 it did in the first quarter of 1996. The company's top line did grow by 41% versus the year ago quarter, mostly attributable to the opening of the company's monstrous Tunica, Mississippi casino last summer. Nevertheless, costs are up and margins are down, also attributable to Tunica. Casino results at Tunica did pick up late in the quarter with the better weather and the opening of a new hotel on the property in early March.

The company's income statement did benefit significantly from completely writing off its equity in STRATOSPHERE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWVQ)") else Response.Write("(Nasdaq: TOWVQ)") end if %> last quarter. Since Stratosphere is no longer on Grand's balance sheet, any further losses Stratosphere incurs will not affect Grand going forward. That is, unless Grand invests additional money into the troubled unit in order to try and save some of its so-called "old money." Negotiations between Grand and Stratosphere's bondholders are continuing and it remains to be seen if Grand will indeed invest further capital into the unit.

Grand also made it known this week that the Mille Lacs Ojibwe tribe has created a task force to assess the options available to the tribe when Grand's management contracts for the casinos in Mille Lacs and Hinckley, Minnesota, are up for renogotiation in April 1998 and May 1999 respectively. Grand currently receives 40% of the gross gaming win at both casinos as its management fee. Theoretically, the tribe could chose someone else to manage or attempt to self-manage the casinos and give Grand the cold boot. More realistically, Grand will take a reduction in its percentage take to the 10-15% range since the company is no longer bringing its "risk capital" to the table like it did when the 40% agreement was inked five years ago. Approximately 17% of Grand's revenue are derived from tribal management contracts, which include two casinos in Louisiana in addition to the two aforementioned Minnesota casinos. As we often say around these parts, stay tuned!

We also received profit numbers that were above expectations from HARRAH'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %>. Harrah's reported profits of $0.17 a share versus the $0.16 analysts were looking for from the geographically diverse gaming company. However, this was down from the $0.30 a share the company reported in the year ago quarter. Harrah's was hurt significantly in Northern Nevada by the closure of Highway 50 in California and in Las Vegas by the major retheming construction going on at their resort there. Operating results were down significantly in its riverboat division due to extensive increased capacity in both the Chicago and Missouri markets.

Harrah's did also announce some key appointments this week to its New Orleans Management Company. It appears the company is proceeding in attempting to revive the bankrupt and half-constructed land casino near the French Quarter. Many analysts are doubtful that Harrah's will ever pull a profit in New Orleans due to excessively high local taxes the company is paying in order to operate the sole land-based, non-tribal gaming license in Louisiana.

Slot machine behemoth IGT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGT)") else Response.Write("(NYSE: IGT)") end if %> reported earnings of $0.22 a share that were in line with estimates. This was above the $0.15 the company reported a year ago. The company has bought back shares recently which did help boost the per share profit. The company did sell about 900 less machines than in the year ago quarter, which was about a 4% decrease in unit volume. The company boosted its profits by benefiting from the classic "razor-razor blade" business model. The profit off the annuities from the progressive jackpot machines it sells is a growing business. This high-margin business grew 9% since last year with decreasing expenses. The most recent progressive machine the company has rolled out, Wheel of Fortune, continues to be excessively popular.

Speaking of Wheel of Fortune, ANCHOR GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %>, IGT's partner in the game, also reported earnings this week. Anchor reported earnings of $0.63 per share in the first quarter. This was below the $0.67 analysts were expecting, but was far above the $0.46 the company reported last year. This represented the nineteenth time the company has grown both revenues and profits versus year prior comparisons -- a simply awesome track record for a growth stock. Results at its Colorado and Nevada operations only grew slightly, while growth in its proprietary games division continues to be robust at about 8% quarter over quarter.

Not only has growth in Anchor's proprietary games division been spectacular, but gross margins for this particular division were a jaw dropping 79% in the first quarter. Anchor announced with its earnings that it has entered into a more permanent employment agreement with key executives in the division, including all-star game designer Randy Adams. After designing three of the past year's most popular slot machines -- Wheel of Gold, Wheel of Fortune, and Totem Pole -- this Fool thinks that any raises these employees received was well deserved. Anchor also announced this week the approval by its board of a one million share buy-back program. With only 13.7 shares outstanding and an extremely small float due to large insider ownership (about 6 million shares), this is not an insignificant buy back.

CLARIDGE announced the termination of its acquisition negotiations with HILTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %> this week. Claridge operates the smallest casino in Atlantic City and narrowly avoided bankruptcy earlier this year.

Troubled PRESIDENT CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PREZ)") else Response.Write("(Nasdaq: PREZ)") end if %> announced the temporary closing of its casino in Davenport, Iowa due to flooding along the access roads leading to the facility. As flooding in the upper midwest flows south, it would not be surprising to see more casinos up and down the Mississippi be closed or have their businesses impacted negatively.

Finally, we did get a significant new casino opening this week. SHOWBOAT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBO)") else Response.Write("(NYSE: SBO)") end if %> opened its majority owned casino boat in East Chicago, Indiana, today. The boat is the seventh casino complex to open in the increasingly competitive Chicago market. The new riverboat offers something their competitors TRUMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %> and MAJESTIC STAR a mile down road desperately lack -- attached parking and easy highway access. It will be interesting to see how this new boat will affect not only Trump and Majestic Star, but its other competitors in the area including Harrah's, EMPRESS, and HOLLYWOOD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HWCC)") else Response.Write("(Nasdaq: HWCC)") end if %>.

Hey look ma, an earnings summary with no red ink!

Anchor Gaming (SLOT)           $0.63
Grand Casinos (GND)            $0.34
GTECH (GTK)                    $0.54
Harrah's (HET)                 $0.17
IGT (IGT)                      $0.22
Mirage (MIR)                   $0.29

Did you know. . .

The Nevada Mega-Bucks progressive jackpot I wrote about last week was hit for a world-record $12.3 million jackpot this week at the new New York, New York casino?

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