LOOKING IN ON: GAMING

Profits rise, but customers might not be betting more

By Liz Benston
Las Vegas Sun

Suburban casino giants Station Casinos and Boyd Gaming Corp. increased their profits in the second quarter, suggesting that the local gambling economy isn't faring as badly as expected from the slump in the housing market, which has earned Nevada the distinction as the state with the highest rate of foreclosures.

On the other hand, continued population growth could be masking the effects of a tougher economy and a more tight-fisted customer. So we may never know how much Las Vegas' housing troubles are factoring into the performance of locals casinos.

What makes Las Vegas unique among gaming market s is the region's consistently strong population growth - and the steady stream of new gamblers it provides. Neither company has been able to specify how much of its profit growth is because of existing customers spending more money versus an increase in customers.

Boyd's locals casinos reported an increase in operating cash flow (the best indicator of how well its casinos are doing) of just less than 3 percent compared with a year ago, while Station's biggest casinos reported an increase of 4 percent. Station's companywide profit was down 44 percent in part because of costs related to expansion and its planned buyout . Analysts say Station, which is expected to go private this year in a management-led buyout, isn't maximizing profit to meet Wall Street expectations.

The troubled housing market has probably has had some effect on gambling budgets, even among those who are gainfully employed or retired with a healthy nest egg. It's no secret that gamblers, before home values headed south, tapped into home equity for cash. Now that home values have fallen, analysts say , homeowners are feeling less flush.

Local s casinos are expected to get a boost as the Strip's construction boom gets under way and the newest wave of luxury resorts opens in the coming years, employing tens of thousands of people.

People who build casinos then spend money inside them.

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During its more than 14 years as a public company, Station Casinos' stock has risen by 575 percent - one of the best-performing stocks of its size. That works out to an average annual increase of about 15 percent, steady enough to invoke comparisons to the steam engine trains implied in the company's name and reflecting the fact that about 80 percent of company revenue comes from gambling, which has grown with the Las Vegas population.

That may be why 72 percent of stockholders, not including top executives and other company insiders, voted Monday in favor of a management-led buyout to take the company private.

At least six groups of shareholders, including a pension fund for firefighters in West Palm Beach, Fla., had filed suit against Station, arguing that management's $90 per share offer was too low and accusing it of self-dealing at the expense of outside shareholders.

And yet, more than 50 percent of Station shares are held by giant mutual funds and other institutions that manage tens of millions - even billions - of dollars and employ research specialists to analyze buyouts. That includes folks whose funds hold Station shares.

To settle the shareholder lawsuit, Station management agreed to disclose additional financial details before the vote, including the prospect that the company's operating cash flow will more than double, to $1 billion, by 2010. That suit is pending.

For the smaller fraction of shares purchased directly by individuals, including the loyal Station gamblers so enamored with the company as to buy shares, selling after such a good run was probably just as difficult as cashing out after an especially lucky streak in the casino. Most gamblers, naturally, would prefer to let it ride.