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Nevada stocks lacking appeal

Nevada offers investors a dicey backdrop for stock investments.

Unemployment ran 13 percent in December in the Silver State, according to the Bureau of Labor Statistics. Only Michigan’s jobless rate is higher at 14.6 percent.

Las Vegas leads the nation with the highest residential foreclosure rate, according to RealtyTrac of Irvine, Calif. Sales, as reflected by sales and use taxes, were down 6.6 percent in December. The gaming revenues dived 10.4 percent in 2009, the largest single-year decline in state history. The number of visitors to Southern Nevada declined 3 percent in 2009, according to the Las Vegas Convention & Visitors Authority.

Not surprisingly, it’s hard to find any public company based in the state with stock highly recommended by analysts.

To select some of the strongest public companies, the Las Vegas Business Press reviewed Standard & Poor’s stock reports. The best of the bunch are not necessarily recommendations for investors, but rather attempts to identify some of the better performers and better prospects in the state’s worst economic recession in a generation.

Analysts speak well of Bally Technologies; Allegiant Travel Co.; two local utilities, Southwest Gas Corp. and NV Energy; and Amerco, the Reno-based parent of U-Haul International.

In Nevada’s struggling economy, it’s easier to find companies that have done poorly and offer less-than- stellar prospects than it is to pick winners.

Shares in the few publicly traded Nevada-based bank holding companies have gone south and some have not come back. Regulators seized Silver State Bancorp of Henderson in September 2008 and Community Bancorp of Las Vegas in August 2009, wiping out their shareholders.

The Bank Holdings, the Reno-based holding company for Nevada Security Bank, is hemorrhaging red ink, according to its latest report. In the third quarter, the bank holding company lost $8.8 million, down from $22.2 million in the second quarter.

In November, the company disclosed that it signed an agreement with the Federal Reserve Bank of San Francisco, which directed the bank to take actions to maintain its financial soundness.

The company’s shares last traded at 15 cents on the pink sheets, down from $7.94 two years ago.

Western Alliance Bancorporation, the Las Vegas-based holding company for Bank of Nevada and institutions in Arizona and California, cut its fourth-quarter loss to $26.9 million from $148.3 million a year ago. The company posted security losses of $3.6 million, down from $115.9 million last year. S&P gives Western Alliance an “investabilitiy quotient” of 8 percent out of a possible 100 percent, meaning that 92 percent of the stock universe looks more attractive.

Western Alliance shares recently traded on the New York Stock Exchange for 57 percent less than they did two years ago. However, the holding company has boosted its
risk-based capital, one measure of net worth, to a healthy 14.4 percent. In a state in which most community banks are struggling, competitors say Western Alliance looks like a survivor.

It’s painful for investors to even think about Las Vegas gaming stocks.

S&P’s bond rating service offered a gloomy outlook for Las Vegas in its Feb. 8 report: “We believe that 2010 will be another challenging year for the Las Vegas Strip, given the prolonged weakened state of the economy and the substantial room capacity that opened on or near the Strip last year, including CityCenter, which we feel will continue to pressure room rates.”

MGM Mirage and Las Vegas Sands Corp. both lost about 80 percent of their value over the last two years.

Wynn Resorts Ltd. dropped 36 percent, making it one of the most resilient Las Vegas casino operators during the wrenching gambling recession.

David Ehlers, chairman of Las Vegas Investment Advisors, declined to make investment recommendations on any casino operators but he commends Wynn Resorts for taking steps to protect its future, such as selling additional stock, which bolstered the balance sheet, and extending maturities on debt.

“My pick of the bunch would clearly be Wynn,” Ehlers said. “He’s been the safest bet (among Las Vegas casino operators).”

Several local analysts declined to make any recommendations on Nevada’s publicly traded companies, apparently because they have nothing good to say and don’t want to offend clients at these companies.

Bally Technologies Inc. ranks highest among Nevada-based public companies in the Standard & Poor’s Equity Research Services five-star ranking system.

S&P’s equity research awarded the slot machine maker a four-star or “buy” ranking, one step down from a five-star “strong buy.” Bally is the only public company to get more than three stars in the S&P equity rankings.

“We believe (Bally Technologies) will continue to post healthy top-line growth on market share gains, expansion by Native American casinos and gains in international,” S&P said in a Jan. 26 report.

Some analysts point to unranked Allegiant Travel Co. as one of the few bright stars emerging among public companies based in Nevada.

A team of five students at the University of Las Vegas, Nevada, analyzed Allegiant in the Global Investment Research Competition held by Chartered Financial Analysts late last year.

“Their financial statements are phenomenal, especially their liquidity ratios,” said Michael BenShimon, 24, a team member who now works as an analyst with a major casino operator.

The only problem: Allegiant’s stock price jumped 40 percent during the first two months of the research. As a result, the team concluded that the stock is fully priced now at about $50 a share.

BenShimon said the company had 27 consecutive quarters of profits.

The company’s Allegiant Air flies short routes between destinations such as Las Vegas and small cities, most of which aren’t served by other airlines. Tickets are sold at a deep discount with fees for extras.

The company also serves as a travel agent for customers who need hotel rooms, rental cars and show tickets.

Allegiant officers like to say the company is “Expedia with wings,” BenShimon said.

To keep debt low, the company relies mostly on relatively old MD-80 airplanes and is a distributor of MD-80 aircraft parts as a sideline. Unlike many airlines, Allegiant doesn’t hedge against spikes in fuel prices.

Don Parker of Gryphon Valuation Consultants and UNLV adjunct finance professor Jag Mehta, two chartered financial analysts, provided guidance for the team and generally agreed with the team’s conclusions.

“The economy does not hurt them as much as it does high-cost carriers,” Mehta said.

The CFAs offered other recommendations.

“Utility companies pay steady dividends and probably are not going out of business any time in the foreseeable future,” Parker said.

“I don’t think anybody is looking to hit a ball out of the park,” Parker said. Investors are “looking for a company that will just give you regular hits.”

He mentioned NV Energy, which yields about 4 percent.

“The company is well positioned to participate in viable alternative energy endeavors,” Parker said.

Southwest Gas has a very similar story and has a consistent track record of increasing its dividends, yielding about 3.5 percent, Parker said.

S&P doesn’t rank either companies’ shares, but it offers some guidance.

Southwest Gas, for example, has a “quality ranking” of B+, slightly better than average. It’s fair value is 3 on a scale of 1 to 5. It’s volatility is low.

The Las Vegas-based company is a gas distribution company that operates as a regulated monopoly in parts of Arizona, Nevada and California. It is affected by the recession, but state regulators set its retail rates based on costs. If it manages costs well, it will likely be profitable.

In Nevada and Arizona, state regulators have reduced the company’s risk more by decoupling rates from sales. If the winter is warm and sales slump, rates are adjusted to compensate and vice versa.

The two Nevada utility companies offer good safety and reasonable yield, Mehta said.

Most investors don’t pick stocks because of their home state, however. To put the Nevada utility stocks in perspective, Mehta identified three that he believes have bigger growth prospects and fatter dividends than either local utility company.

Excelon Corp. of Chicago is a large electric utility that yields 4.68 percent and is the nation’s largest nuclear power plant operator. Pfizer Inc., the giant drug company, yields more than 4 percent and is undervalued. Energy Transfer Partners L.P., a gas pipeline company that yields 7.8 percent has good prospects for growth, Mehta said.

Parker, however, did find a Nevada company that allows investors to bet that hard times are ahead. It’s Amerco, which operates U-Haul.

If high unemployment continues, workers will move to look for jobs, Parker said in an e-mail.

He added: “And, if that move means downsizing, Amerco can accommodate your self-storage needs as well through another subsidiary, SAC Holding II, through which it owns self-storage properties across the U.S. and Canada.”

Contact reporter John G. Edwards at
jedwards@reviewjournal.com or 702-383-0420.

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