Look and Listen

The Times today continues a new feature, Stock Exchange, in which staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Mirage Resorts (MIR)

Mirage close Monday: $20.94

Jim: Mike, we start with Mirage Resorts, and there’s no better metaphor for the big move everyone keeps predicting for this stock. It’s a mirage, all right.

Mike: You’re betting against the house, pal. Here are the basics: Mirage is the premier Las Vegas-based gaming operator in the country. On the Vegas Strip they’ve got the Mirage itself, Treasure Island and a half interest in the Monte Carlo. They also own the Golden Nugget, probably the best property in downtown Vegas.

Jim: In fact, this company used to be called Golden Nugget.

Mike: In the next year or so it’s going to open more first-class properties, starting with the $1.5-billion Bellagio, which will be the No. 1 resort on the Strip. Their Beau Rivage will probably set the standard in Mississippi gaming--don’t laugh, that’s the third-most-important gaming state in the country.

Jim: No question, Mirage is thought to be the best in the business.

Mike: That’s important. People often talk about whether Vegas is “good” or “bad”--moral or corrupt, tasteful or tasteless, heaven or hell. To me, that’s not the right way to think about Vegas and gambling. The only thing you should ask is whether a property is good Vegas or bad Vegas. Mirage Resorts is great Vegas. Steve Wynn, its chairman, is the smartest showman in the industry, and his properties are premier high-roller resorts, which means they get the richest players in town.

Jim: Splendid. There’s just one problem.

Mike: The stock’s been in the toilet. That’s a problem?

Jim: It is if you’re an owner. Mirage has dropped 20% over the last 12 months. Today it languishes in the low 20s even though the hype about the Bellagio’s opening would drown out the din on any casino floor. I should know--I owned some shares before throwing in the towel earlier this year.

Mike: Ready to hear why you sold out too early?

Jim: First let me explain why I sold when I did. It’s become clear that there’s a glut of hotel-casinos coming on board in Vegas. Asia’s problems are reducing the number and action of high rollers who normally flock to the Mirage’s properties. If that wasn’t enough, Roy of the hit animal show “Siegfried & Roy” hurt his hand recently, forcing Mirage to cancel 60 shows. Get this: The mishap nicked a penny off Mirage’s second-quarter profit!

Mike: Look, the market always frets when Vegas is in a building phase, because the number of visitors and the casinos’ profits drop. It happened a few years ago when the last wave of big casinos was coming on line.

Jim: Why?

Mike: Because the companies are preoccupied with getting the new properties off the launch pad and tourists are waiting for the new properties to open. But come the end of this year, Vegas is going to start booming again. Mirage says bookings at Bellagio are running ahead of expectations, and the average overnight room rate is $258! Anyone who’s been to Las Vegas to partake of the $29-a-night room specials, like me, knows that’s exceptional.

Jim: But that’s the problem with this stock: Everybody knows the Bellagio, come opening day in October, will be the toast of the Strip. Yet the stock still doesn’t move! That tells me the Bellagio is already built into Mirage’s price.

Mike: Not true.

Jim: If the Bellagio is a smash beyond expectations, the stock could get a lift. But that’s unlikely because of the overall Vegas problems we just mentioned. If Bellagio is right on target, it’s neutral for the stock. And if Bellagio comes up one chip short, look out below.

Mike: The market tends to value gaming companies in a strange way, with a very short-term view. So it gets nervous when a new hotel is coming on line. But if it does well, the stock gets a pop.

Jim: If it does well ....

Mike: Steve Wynn is master marketer. After all, he turned a couple of aging European lion tamers with a hackneyed act into the hottest draw on the Strip--at 90 bucks a seat. And when Bellagio opens he’s going to pull out all the stops.

Jim: I wouldn’t sell Wynn short, either. But even if you’re right, the Bellagio is going to cannibalize the Mirage’s other Vegas properties. Everyone will want to see the new kid on the block.

Mike: Until now, what’s been the hardest hotel room to get in Vegas? The Mirage. If people can’t get into the Bellagio, they’re going to spill into the Mirage. I’d bet the cannibalization will happen a rung or two down on the ladder, places like New York New York, the Luxor, even the MGM Grand.

Jim: All moot. The overarching problems in Vegas aren’t going away at least through 1999, with too many rooms and not enough high rollers to keep the numbers--and the stock--going higher.

Mike: People aren’t going to stop gambling. And soon Mirage will again be grabbing its historical percentage of Vegas’ total win. Yes, this stock has bumped along at the bottom, but it’s ready to pay off.

AirTouch Communications (ATI)

AirTouch close Monday: $58.63

Mike: Up next is AirTouch Communications. Jim, are you any more successful than I in hacking through the acronyms and jargon infecting the business of wireless communication?

Jim: Boy, you hit it on the head. It’s ridiculous how this business is filled with inside terminology, which makes it tough for any investor to size things up. It puts the computer industry to shame.

Mike: I’m not intimidated.

Jim: I’m not either. And in full disclosure, I’m an AirTouch cellular customer--AirTouch, of course, being a spinoff from the old Pacific Telesis.

Mike: In fact, it’s one of the stranger corporate spinoffs ever executed. PacTel not only spun off its wireless business in 1993 to create AirTouch, it spun off its chief executive. If you remember, this was a controversial move. Sam Ginn, who was the head of PacTel, had the choice of sticking with the parent company or going with the start-up. He went to AirTouch--though he’s always insisted it was the PacTel board’s choice--and he’s created a heck of a business there.

Jim: This is a very good company, and not only here. It’s international operations are extremely promising. AirTouch now has more than 15 million wireless customers--including those with pagers, traditional cellular or “analog” phones, and newfangled digital cell phones with greater capabilities.

Mike: Right. That’s the so-called PCS market, for “personal communication services.”

Jim: And to bolster the pro-AirTouch argument, their second-quarter earnings came out recently and blew everyone away.

Mike: That’s an understatement. They doubled their quarterly profit from a year ago to $147 million and added about 955,000 customers. And there are other remarkable things about this company. One is Ginn, the CEO. He’s the kind of visionary executive you don’t often see emerging from any industry, much less a regulated utility like local telephony.

Jim: What’s so visionary about him?

Mike: He saw the potential in wireless and turned AirTouch into perhaps the market’s only large-scale pure play in wireless telecommunication. And as you mentioned, one of the great things about AirTouch is its overseas interests. It’s got franchises in a dozen foreign countries, where customer penetration is much lower than it is in the United States and thus the growth possibilities are much greater. In countries like Germany, Portugal, Sweden, Belgium, Italy, Spain and Poland, wireless may become the alternative to replacing outdated land-line infrastructures. AirTouch is sitting there, ready to exploit that.

Jim: Despite all that, I wouldn’t buy this stock at this level.

Mike: Why not?

Jim: It’s just too rich. Before the market’s recent nose dive, this stock had gone up 71% in 12 months. Lately it’s fallen from around $65 to $58, but it’s still trading at 63 times this year’s earnings. Given the competitive landscape in telecommunications and the skittishness of this market, I’m very reluctant to buy a stock at that multiple no matter how good a company is.

Mike: I agree it’s a rich multiple. But this is one of those rare cases in which it’s justified by the company’s potential. AirTouch has had a lot of success in reducing its cost per subscriber and retaining its customer base. Overseas there are some markets, like Eastern Europe, where penetration in the market is as low as 2%. Think of the possibilities of growing a market like that.

Jim: Sure, sure. But to return to your point about keeping costs down, AirTouch had better slash costs--because in the U.S. especially, the price competition in this business is ferocious. I know that firsthand because, with almost no prodding, AirTouch offered to cut my monthly service fee by some 20% to 30% if I’d sign on for another year. That would make me very nervous as a stockholder because it doesn’t bode well for their profit margins.

Mike: But they got you to sign on for another year, didn’t they?

Jim: Yeah ... .

Mike: There you are. One of the huge cost centers in this industry is the cost of signing up and retaining customers. AirTouch is focusing on that because it’s cheaper to give you a discount rate than to lose you and spend hundred of bucks to sign up another Jim Peltz. By the way, there’s another factor in AirTouch’s future--the impact of telecom mergers.

Jim: That’s a bright spot, I agree. This whole industry has just been rife with big, big mergers, the most recent one of which is going to affect AirTouch considerably. That’s Bell Atlantic and GTE.

Mike: Matter of fact, AirTouch may inherit a valuable customer base because regulators will force Bell Atlantic and GTE to divest customers and service regions where they have an overlap.

Jim: Not to mention that AirTouch itself might wind up in some sort of a merger situation within the next 12 to 18 months, though I know of nothing in the works. But that’s still not enough to buy the stock right now.

Mike: I’d be a buyer. It’s a great business with a lot of growth ahead of it that’s not entirely reflected in the stock price, despite the rich multiple.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.