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Best of Howard Stutz

Gaming Guru

Howard Stutz

By Strip's bright lights, analyst watches casino companies tick

15 October 2007

LAS VEGAS, Nevada AND NEW YORK -- When Bill Lerner was appointed lead gaming industry analyst for international investment house Deutsche Bank, he packed his spreadsheets, stock charts and financial information and headed 2,240 miles east of the company's New York headquarters to the bright lights of the Strip.

The bosses on Wall Street didn't seem to mind.

Lerner, 35, thought it would be a novel approach to set up the investment bank's gaming research arm in the heart of the casino industry. A year later, the idea seems to have paid off.

"Strategically, we thought that our relationships around the industry would improve and we thought it would help us guide our clients more accurately to make better investment decisions," Lerner said. "In fact, we didn't realize until we got here how big the initiative would become."

From his Las Vegas office, Lerner supervises analyst coverage of more than 30 publicly traded casino operators, gaming equipment manufacturers, and nongaming hotel companies.

With an office a few blocks from the industry's largest companies, Lerner has developed an on-the-ground approach to happenings in the gaming industry. He has also visited nearly every gaming jurisdiction, domestically and internationally. Worldwide, Deutsche Bank follows dozens of gaming corporations.

Living in Las Vegas has allowed Lerner and his analyst team to write research reports that differ from the competition, such as in depth coverage on Strip infrastructure issues, casino employment matters, and the impact growth in the casino industry is having on McCarran International Airport.

"By living here, we can step back and contemplate what the enormous pipeline of development on the Strip will have on local matters in a much better way than we would sitting at a desk in New York," Lerner said. "We also have better access to individuals who might help us in our initiative to research these matters."

Question: What have been some of the benefits from setting up an office in Las Vegas?

Answer: We are much more thoughtful about the research product that's published. And part of that is from living here and understanding the market differently.

We are able to be much more effective in the product we create. We can sit down with the people from McCarran or the Regional Transportation Commission.

We also have a better understanding of the locals casino market, such as watching the promotional environment.

Question: How has being in Las Vegas changed Deutsche Bank's relationship with leaders in the gaming industry?

Answer: Our relationships have been strengthened and not just our relationships with senior management. Other people are also as important, such as gaming regulators, general contractors and union people.

Question: What does a gaming analyst do?

Answer: It's not one of those jobs that you can explain easily. We analyze the gaming and lodging industry in order to help institutional investors make better investment decisions.

We look at every aspect of the industry and the public companies within that industry. Part of the job is analyzing the financials and forecasting financials.

Part of the job is understanding the competitive nature of a market and various companies. Part of the job is understanding regulatory framework.

Question: How many analysts follow gaming for Deutsche Bank?

Answer: There are two of us in Las Vegas. We have three people in New York and three people in India. We also have a wonderful dialogue with our counterparts who follow the high-yield section in New York, Hong Kong, Australia and Kuala Lumpur, (Malaysia)

Question: There are a growing number of gaming companies (Harrah's Entertainment, Station Casinos, Penn National) that are being bought out by private equity firms and will be removed from the public markets. How is this impacting the industry?

Answer: There is more capital available to this industry than probably ever before. The private equity initiatives are taking place because of the spectacular development pipeline globally. From an investment banking standpoint, it's really a ripe opportunistic time.

There will be a lot of capital needs for this industry and that might breed new public companies, which I expect to see in the next few years. Melco PBL, a U.S.-listed company (Nasdaq National Market) with a Macau play, is an example.

At the same time it also breeds future potential liquidity events for the private equity folks. What that means is these same companies will become public again either through public debt or equity, maybe under a different name or a different mix of assets. I suspect we'll see a lot of these companies again.

Question: Why do investors like the gaming industry?

Answer: There's a significant amount of interest in the gaming industry from just about every style of money, including the growth investor, the value investor, the international money manager. There is some appeal from this space for everyone. Many other sectors are one dimensional from an investor perspective. Not gaming.

It's also a highly technical and quite complex industry. You have the leading gaming suppliers and traditional hotel companies.

It's also not a federally regulated industry. Gaming is the high-maintenance sector because each state has regulatory oversight of the industry so you are constantly with different measures, changes and proposals and how they might relate to each individual company.

Question: How is the gaming sector different from following other businesses?

Answer: One of the things about this industry is you can touch it and feel it.

The good analysts get on the ground and do fundamental research. It's amazing what you can find out by traveling around, for example, Oklahoma, where some of the Indian tribes are based. You can meet with the slot managers and tribal members and speak with customers. You can look at and play the product. It's something you can't get from sitting in an office in Manhattan.

Question: Have you adjusted to life in Las Vegas?

Answer: We realized quickly what a wonderful place this is to raise a young family. I also joined the board of the Las Vegas World Affairs Council, a nonprofit with a mission to bring international programing, like speakers and seminars, to the city to educate the population about international affairs. It's been an interesting challenge.