High-flying Resorts International, which went into business in the early Fifties as the obscure Mary Carter Paint Co., will face its moment of truth in the next few weeks, when it officially brings gambling to Atlantic City. Nobody, of course, including Resorts' management, can even begin to guess how well - or how poorly - the company will fare with its casiono and hotel.
Investors, though, aren't waiting to find out. They've gone wild over Resorts, turning it into one of the Market's hottest stocks. Over the past 12 months, Resorts' Class A shares have risen from a low of 8 3/4 to a high of 35 1/4 (they were recently 35); even more spectacular were Resorts' highly volatile Class B shares, which shot up from 17 to 64 (recently 52). Clearly, investors are betting on the outcome - leaving little room for even the tiniest disappointment.
The obvious question is how much money will Resorts make? That is what the stock rise is all about. Since Resorts will be betting $50 million of its own on the hotel and casino, obviously it has some exuberant goals. At lunch the other week in a secluded Indian restaurant, Resorts chairman James Crosby and President Jack Davis laid out their targets publicly to me for the very first time. Said a somewhat restrained but nevertheless optimistic Crosby: "While we have no way of judging what profits will be, we ought to do as well as the three leading Las Vegas casinos."
The three leading Las Vegas casinos, Crosby and Davis tell me, all do close to $100 million a year in gross wins (gaming revenues before expenses). Crosby figures Resorts' after-tax profit margins on such revenues (including Atlantic City's 8 percent tax on all gross wins) should run at least 20 percent - which is equivalent to a net profit of about $20 million.
Based on Resort's total 3.2 million shares outstanding, such a profit showing would produce gaming earnings of about $6.60 a share on a running twelve-month basis. Put at least half of that into this year's results because of the imminent start-up of Atlantic City gambling and you come up with about $3.30 a share in gaming profits for 1978.
Carry the exercise a step further and Resorts' 1978 earning could run even higher - another 80 cents a share or so higher. This stems from Resort's belief that its non-Atlantic City business, which includes the management of two casinos in the Bahamas, will at least equal 1977's operating profit of 78 cents a share.
I asked Crosby what he thought of these estimates - which add up to about $4.10 a share in 1978 and at least $7.40 a share in 1979 (embracing all company positions). His response reflected unmistable confidence: "I think they're conservative, realistic figures."
Crosby concedes that heavy start-up costs could hurt profitability in non-gaming operations (hotel, food, and entertainment). But he expects a 75 percent year round occupancy rate in the hotel. And at that rate, he says, the hotel business would be profitable in its own right. (Gaming profits are expected to account for two-thirds of overall casino-hotel earnings, while non-gaming revenues are estimated by Davis at $50 million annually.) As for competition, Crosby thinks a second casino in Atlantic City is at least one-and-a-half to two years away, giving Resorts a temporary monopoly. He also expectes a permanent gambling license to be granted by September. At present, Resorts have only a temporary gambling license.
With Atlantic City gambling a matter of weeks away (barring something unforeseen), the publicity surrounding it should accelerate. Therefore, speculative interest in Resorts - with its sizable $11,000-share short position - could heighten despite the already skyrocketing advances in the company's shares.
But before rushing to buy Resorts - whose Class A and Class B shares were recently sporting astronomical price-earnings multiples of 41 and 68, respectively - one might well heed seriously the danger signals flashed by none other than Crosby himself.
"In Atlantic City," he says "you can imagine almost any figure . . . and the problem is that we don't know ourselves what will happen.