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Howard Stutz

A Tale of Two Kinds of Companies

2 March 2005

A lesson to be taken away from February's performance of Nevada's major gaming company stocks was that it's good to be a casino operator.

For gaming equipment manufacturers, it's another story.

The share prices for most of the major casino operators closed on high notes for the month, with some companies nearing or surpassing their 52-week highs. Slot machine manufacturers, however, saw their stock prices fluctuate downward somewhat in February.

"The manufacturers are waiting for their next major catalyst to move them forward," said Deutsche Bank gaming analyst Marc Falcone on the possibility of new gaming jurisdictions opening while other locations seek to increase their slot machine totals.

On the whole, the gaming sector is still doing well.

In the Applied Analysis Gaming Index, a weighted average of local gaming stocks published monthly by the Las Vegas-based financial consulting firm, shares tracked in the listing increased 4 percent over January and are up 39.1 percent from a year ago.

Brian Gordon, a partner in Applied Analysis, said the increases were due to casino operators reporting strong earnings during February.

"Looking at the overall gaming sector, it's outperforming other sectors and the market as a whole," Gordon said.

He cautioned, however, that the expected closing of MGM Mirage's $7.9 billion buyout of Mandalay Resort Group this month could flatten gaming stock increases, "as profit-taking by investors will play a role in pricing."

Falcone said it remains to be seen if the current Mandalay shareholders, who will earn $71 for each share owned through the buyout, will reinvest their new-found wealth in the merged company.

"They'll have a lot of equity built up and the question that remains to be answered is how they will invest that money," Falcone said.

The same scenario will play out toward the end of June, when Harrah's Entertainment is expected to close its $9.4 billion buyout of Caesars Entertainment.

In year-over-year comparisons, gaming stocks have flourished so far in 2005.

MGM Mirage had an average daily price in February of $76.70, an 81.76 percent increase compared with a $42.20 average daily price in February 2004; Station Casinos' average daily price in February was $61.75, up 72.06 percent compared with the average daily price of $35.89 a year ago.

Boyd Gaming Corp. hit an all-time record of $52.67 on Feb. 15, almost a week after announcing record earnings.

On Tuesday, MGM Mirage closed at $75.28, up $1.11 or 1.5 percent; Station Casinos closed at $60.85, down 9 cents or 0.15 percent; and Boyd Gaming closed at $49.70, up 69 cents or 1.41 percent.

Gaming analysts continue to have bullish opinions of stocks in casino operators.

"Gaming has been going gangbusters this year and we see further upside potential," Jefferies & Co. analyst Larry Klatzkin said in a recent note to investors.

On the reverse cycle are the slot machine manufacturers, which have been affected by a slowdown in the game replacement market where ticket in-ticket out capabilities and other technological advances have run their course.

For February, industry giant International Game Technology had an average daily stock price of $31.06, down 4 percent from January and down 17.13 percent compared with February 2004's average daily price of $37.48 percent. Alliance Gaming had an average daily price of $11.09 in February, down 54.64 percent compared with an average daily price of $24.45 a year ago.

On Tuesday, IGT closed at $30.19, down 27 cents, or 0.89 percent, and Alliance Gaming closed at $11.15, up 5 cents, or 0.45 percent

"The manufacturers are not doing poorly, but they have definitely slowed as most of the replacement cycles for slot machines have been completed," Gordon said. "The manufacturers experienced phenomenal growth rates in recent quarters but sales are much softer. The prospects for that portion of the sector are down the road."

Falcone said manufacturers have tied their sales revenues for the next year to growth of gaming in overseas markets while waiting for expansion opportunities in California, Pennsylvania, Maryland and Florida.

Goldman Sachs gaming analyst Steven Kent said in a note that IGT is focusing on Russia, the United Kingdom, Italy and Macau as the most visible expansion opportunities.

He said when one market moves toward expanding gaming, other markets follow suit.

"IGT thinks that Macau's success in gaming will only push markets like Singapore, Thailand and the Philippines to evaluate gaming even more closely," Kent wrote. "The point here is that while the slot market is in the middle of a one, two year lull, there are a lot of potential opportunities that slot manufacturers have to be optimistic for over the next several years."

The volatility in gaming stocks was apparent Monday when the Louisiana governor floated the idea of increasing the state's tax on casinos.

The news sent shares of Las Vegas-based Pinnacle Entertainment down 6 percent as the company nears its opening of a $365 million project in Lake Charles.

Falcone called the governor's comments, "a trial balloon" that was quickly shot down.

"Pinnacle is facing considerable pressure from potential tax increases in Indiana and Louisiana and the potential impact of gaming in Texas," Falcone said. "However, we think the shares already reflect a significant amount of negative sentiment. We think investors could be rewarded from current levels once this noise of higher taxes subsides."

Pinnacle closed Tuesday at $15.96, up 46 cents or 2.97 percent.

A Tale of Two Kinds of Companies is republished from