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Betting On Baccaratmania

26 July 2000

As reported in Individual Investors Online, "Gaming in Las Vegas is about more than just chain-smoking, t-shirt wearing customers playing slot machines over and over. It's also about high rollers and baccarat.

Baccarat, played with eight decks of cards, is preferred by high rollers because of its intensity - 40 to 60 hands per hour -- and favorable odds. Additionally, baccarat carries its own casino mystique, given that the gaming area is generally separated from the casino flow with the traditional symbol of exclusivity: the velvet rope.

According to analysts Jason Ader and Marc Falcone with Bear, Stearns & Co., high rollers are accorded $1 million-plus credit limits, sometimes wagering as much as $200,000 per hand. The high roller market includes only about 200 gamblers, about 75% of whom are Asians, they add.

The heavy representation of Asian tycoons helps both baccarat revenue and Strip revenues in general -- though some casinos benefit more than others. In 1998, when Asian economies hit the skids, the Strip's baccarat business fell 20.5%.

Recently, though, the trend has been positive. In the first four months of 2000, casino baccarat win (a factor of the increase in ``drop,'' or amount wagered, and an improvement in ``hold,'' the percent kept by the casino) is 24.2% higher than last year. February saw the third-largest drop ever.

Ader and Falcone think Park Place Entertainment (NYSE: PPE - news) and MGM Grand (NYSE: MGG - news) should benefit most from the improving trends in baccarat revenue.

``If you want exposure to the high end of casino play, the two best plays are MGM Grand and Park Place Entertainment,'' says Falcone, both of which are Buy-rated.

Though baccarat revenues for the month of May, the latest for which full Strip data are available, dipped 12%, this May contained one less weekend than last year's, according to Falcone, who added, ``our baccarat outlook is one of continuing strength.''

One reason: the Asian economies are doing well. Another, more elusive reason is that the year 2000 is the Year of the Dragon, and the dragon is symbolic of power and luck in Chinese astrology. Many gamblers, even at the high end, are eager to test their luck when the astrological signs are in their favor, the analysts note.

Latin American high rollers comprise an estimated 10% of baccarat players, though that figure is likely to be boosted by strong Latin American economies, claim the Bear Stearns analysts.

The domestic share, currently at 15% to 20%, is also on-trend, given that baccarat is acquiring greater panache, partly by attracting more high-end clients like professional athletes and other celebrities.

Then there's the wealth effect, which helps more visitors reach the point of trying their hand behind the velvet ropes: affluent visitors now comprise 22% of visitors in 1999, compared to 12% in 1995, according to Strip data.

That wealth effect is not only helping drive interest in baccarat, its boosting betting levels in other major casino games, like blackjack, roulette, and craps, all of which are registering double-digit increases for the first four months of 2000. The score through April is 21% ex-baccarat versus 24% for baccarat.

Baccarat averages about 13% of Strip revenues, though that figure fluctuates enormously. According to Falcone, Bear Stearns' earnings models normalize this monthly variation, while also incorporating an assumption of ``rebounding baccarat revenues continuing though the fall and New Year.''

With baccarat, big bets can cause large swings in drop and hold. The casino's advantage (which is slimmer in baccarat than other games) applies over the long run, though not so well over the short run. Baccarat, like poker, is streaky.

That's why casinos like to keep players at the table long enough to ``normalize'' their win, Ader writes, and why high roller ``comps'' are so extensive.

Of the three major casino games, baccarat, at 13% of revenue, shows the greatest short-term swings as a percent of Strip revenue, and carries a standard deviation of 43%.

In contrast, slots account for 48.9% of revenue, with a standard deviation of 7.1%, while blackjack (15.9% of revenue) varies by 11.7%. In other words, revenue from slots and blackjack is far more predictable.

Baccarat is a ``big margin, big costs'' game that's more profitable than its more mainstream counterparts, write Ader and Falcone, though one whose revenue stream is not as predictable.

Still, it's a good game for a casino. Though costly -- high-end customers demand lots of pampering -- baccarat generates higher win per table of $6,307 per day, versus $1,430 for craps and $98 per table for blackjack, according to the Bear Stearns analysts.

The new MGM stands to gain more from the increase in baccarat's popularity, since the high-end game accounted for 13% of total 1999 gaming revenues of $2.1 billion, compared to about 4% to 5% of Park Place's 1999 revenues of $3.3 billion.

According to Falcone, ``from the standpoint of baccarat alone, MGM shares are the clear winners.''

Basically, says Falcone, ``MGM offers a better class of assets, i.e., higher-end restaurants and better entertainments, which include its Shadow Creek golf course and the Mansion at MGM Grand hotel.''

Falcone thinks Park Place's valuation is cheap, noting that shares trade at about 6 times EV/EBITDA, compared with 9 times for MGM Grand.

Bear Stearns' 12-month target price on Park Place is $16-$17 and $40 for MGM Grand, a hefty premium to the current price of both stocks.

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