The Passed Seven
by Paul Larson (MF Parlay)

MARKET CLOSE             4/25/97    5/2/97
Nasdaq Composite:        1209.29   1305.33 (+7.94%)
CBOE Gaming Index (GAX):  191.89    205.76 (+7.23%)
S&P 500 (SPX):            765.37    812.97 (+6.22%)

Chicago, IL (May 3, 1997) -- Hope you had your seatbelt firmly attached this week! As inflation and interest rate hike fears were calmed earlier in the week, the markets moved sharply higher. And I mean sharply higher. The Nasdaq was up nearly a hundred points this week alone. One week! Not a good week to be on the short side of the equation and excellent one for the bulls.

The gaming index also took off like a rocket this week with the rest of the market. The 7.23% rise was the largest one-week move we have seen since tracking the GAX on a weekly basis. Whoever said that markets fall faster than they rise ordered a few rounds of humble pie this week.

Before this week, the gaming index was doing terribly. As any regular reader of this column knows, the gaming industry has been in a bear market for almost nine months now. Brigam, a frequent contributor to the gaming industry board on AOL, was kind enough to dig this morsel of information out of last week's Barron's:

On page MW107 of the April 28 Barron's, there's a listing of stock-price performance for 96 industry groups. Percent changes are shown, and the rank, by percent change, is shown for each of three time periods.

Here's the data for "Casinos":

For last week: Casino stocks lost 2.49% as a group, placing them at rank 85 out of 96.

For latest 12 months: Casino stocks lost 37.75%, placing them at rank 96 out of 96!

Since 12/31/96: Casino stocks lost 18.36%, placing them at rank 96 out of 96!

If this piece of published information doesn't prove that we've been in a bear market, I don't know what does. Just think, as of Monday the gaming industry was basically the worst performing sector for both year to date and the past twelve months. So next time your friends who are heavily invested in networking or restaurant industries start whining about their sector's performance, take notice, because gaming is worse. Our war stories are better. We deserve the most empathy. We're the best at being the worst.

Well, at least that held true in the beginning of the week. This week's jump higher was a welcome surprise, but many gaming stocks have a long, long way to go before reaching the heights achieved last summer.

One of the unfortunate side effects of this market stride forward was it took TRUMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %> along for the ride. Just in case you missed it, the Fool Portfolio decided to short Trump last week. Not like this has anything to do with the stock, but there are published rumors floating around that the Donald and Marla Maples are getting a divorce. Could it be the Fool's short that pushed Donald over the edge? <Removing tongue from cheek>

HARRAH'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %> was in the news more than a few times this week. As can be expected in any company that has been underperforming, Harrah's annual meeting was not exactly a smooth running affair. The company has been been under attack from the Hotel Employees and Restaurant Employees International Union which represents about 10% of the 22,000 employees of the company and owns a whopping 110 shares. The union introduced to a vote several initiatives that would remove the company's poison pill provisions.

The business wire first ran a story (obviously started by the union) that said that the company's by-laws had been changed via shareholder vote and that the poison pill protections the company has were null and void. However, a closer look at the facts is in order.

The company's certificate of incorporation require that 75% of all outstanding shares need to vote for a proposal in order to effect a by-law change. Initial results show that roughly 33% of the outstanding shares voted for the union proposal. Why is the union claiming victory? It is claiming victory because 51.4% of the shares voted were for the by-law change. The union is saying the company should use the number of shares voted and a simple majority where Harrah's is following its corporate by-laws and using the total number of shares (including those that did not vote) and the 75% figure in its certificate of incorporation. Watch for a nasty legal battle to unfold in the coming weeks, but this Fool would be betting that the company is going to KO the union.

Harrah's also announced that it was indeed going ahead with its plans to consolidate its Tunica, Mississippi, operations. The company had been operating two separate riverboat casinos in the city. On May 19, the company will close its older casino which opened in 1993 and consolidate its operations at the newer Harrah's Mardi Gras casino which has been open a little over a year. When the casino closes the total amount of casino square footage in the county will drop roughly five percent. This should be of some small help to the other operators in the city.

Tunica's 500-pound gorilla, GRAND CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GND)") else Response.Write("(NYSE: GND)") end if %>, had a nice run this week. The stock, which had been floundering for weeks, sprinted forward over 20% the past five trading days after it became publicly known that Lyle Berman, the company's CEO, shelled out over $3 million of his own money to buy 300,000 shares of the company's stock. The stock closed at $12 1/8, up $2 1/8 on the week.

ITT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITT)") else Response.Write("(NYSE: ITT)") end if %> reported earnings of $0.27 a share this week. The company's Sheraton casino in Tunica is reported to be on the auction block and is being held as an asset for sale on the company's balance sheet. Sheraton Tunica had EBITDA in the first quarter of $3 million, or roughly half of what it had last year before Grand Casinos came to town. There were also reports this week that ITT was close to selling its stake in New York's WBIS television station to Paxson Communications. ITT bought the station with Dow Jones and Co. for $207 million two years ago and the rumored sale price of the station is $250 million. ITT has been rapidly disposing of assets and raising cash and this sale will yield exactly what ITT wants -- more cash to fend off HILTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %>.

HOLLYWOOD CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HWCC)") else Response.Write("(Nasdaq: HWCC)") end if %>, another Tunica operator, announced positive earnings on Monday. Through expansive cost cutting and improved results at its newly expanded Tunica facility, the company was able to put up positive earnings of $0.06 per share, or $0.04 before a one-time gain. This was up from the $0.25 per share loss the company posted in the fourth quarter. Looks like the rumors of improved results were in fact true.

It also looks as though Hollywood's decision to spin off its Atlantic City operations to GREATE BAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GBY)") else Response.Write("(AMEX: GBY)") end if %> was a good one since Greate Bay also reported results this week that were abysmal. Greate Bay announced it has lost $0.47 a share for the most recent quarter. The results aren't as bad as last year, when the company lost $9.8 million, or $1.89 a share, in the first quarter. The company's EBITDA this year was $7.2 million where the interest expenses were higher at $9.7 million for the quarter. Having interest expenses eat away more cash than the company can produce from operations is a waving red flag in this industry. If this trend continues, it is only a matter of time before Greate Bay files for bankruptcy relief.

Speaking of troubled companies, BOYD GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BYD)") else Response.Write("(NYSE: BYD)") end if %> made some interesting decisions this week. After some marathon board meetings, the company decided to significantly write down its Kansas City operations. The $115 million write-off was done to bring the value of their Kansas City casino to a more fair value on their balance sheet. However, any accountant will tell you that the carrying value of the assets on the balance sheet doesn't mean squat to operations. The write off will not effect the company's liquidity or cash flow. The company announced this week that before the one-time charge it earned $0.10 a share in the quarter. After the one-time write off, the company lost $1.27 a share in the first quarter.

Finally, the May 1 deadline set for California's tribal casinos and the state of California to come up with a gaming compact was postponed. There is no tribal gaming pact and therefore the Indian casinos in the state are technically operating illegally. It looks as if the state does not intend to close the casinos, but the casinos do need some sort of regulation badly. As they say, stay tuned!

Link of the week

This is a new feature running from here on out that will highlight some of the more interesting web pages that are out there concerning the gaming industry. If you find an interesting page you think you would make a good addition here, mail me or post the link in the gaming industry message board here on AOL or on the web at www.fool.com.

This week finds us traveling down south to Mississippi. The state has been getting some increased attention lately and the page at www.mississippicasinos.com is a great place to start your research on the area. Information is posted on every casino in the state and there is also some fun programming the creators have incorporated page. So, if you have a moment... check it out!

http://www.mississippicasinos.com

Whoops, I made a mistake, that's all!

Remember that Sesame Street segment where some kid would be using building blocks then would accidentally knock over his tower. The music would then cut in, "Whoops, I made a mistake, that's all! Making mistakes is never fun!" Well, Fool, this kid made a few mistakes last week.

In the earnings summary I listed CASINO MAGIC'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMAG)") else Response.Write("(Nasdaq: CMAG)") end if %> earnings as a positive $0.10 a share. As I had written about earlier in the article, the company did not make a profit. In fact, they lost $0.10 a share in the first quarter. I also left out some notable earnings releases last week and those I left out will have an asterisk in front of the company name this week. Let's hope I don't have to run this segment too often.

Earnings Summary

Yet again we have a truckload of earnings to digest this week. Without further delay...

American Wagering (BETM) $0.07
Bingo & Gaming (BING) $0.01
Black Hawk (BHWK) $0.17
Boyd Gaming (BYD) ($1.27) [$0.10 before charge]
Gaming Lottery (GLCCF) $0.48 [$.35 before gain] (annual results)
Greate Bay (GBY) ($0.47)
*Hilton (HLT) $0.26
Hollywood (HWCC) $0.06
Inland Casino (INLD) $0.22
Intl. Lottery (ILI) $0.01
Intl. Lottery & Totalizator (ITSI) ($.009)
Intl. Thunderbird (VSE: INB) $0.06
ITT (ITT) $0.27
Jackpot (J) $0.21
Latin American (LACI) ($0.03)
Mikohn (MIKN) $0.05
Monarch (MCRI) $0.09
Patriot American (PAH) $0.25
PDS Financial (PDSF) $0.05
Penn National (PENN) $0.09 [$0.11 before charge]
*Riviera (RIV) $0.19 [$0.35 before charge]
*Scientific Gaming (SG) $0.44
*Video Lottery (VLTS) $1.29 [$0.03 before gain]
WHG Resorts (WHG) $0.74

Private Companies

Claridge ($4.8 million)
Horseshoe Gaming LLC $15.0 million

Good luck this week!

Did You Know. . .
There was a 28.74% drop in the number of welfare recipients in the state of Mississippi from 1992 to 1994? Casinos first opened in the state in 1992.

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