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Best of Howard Stutz

Gaming Guru

Howard Stutz

Casino Revenue: Gaming Stocks Start '05 Strong

1 February 2005

As gaming companies, including giants MGM Mirage and Harrah's, ready their quarterly earnings reports this week, stock prices for the major operators in January reflected investors' optimism that results will surpass Wall Street estimates.

Two pieces of news during the month -- Caesars Entertainment increasing its guidance for its quarterly earnings per share and Station Casinos announcing the company's fourth-quarter revenues were up 15 percent -- pushed the entire sector higher, according to the Applied Analysis Gaming Index, a weighted average of local gaming stocks published monthly by the Las Vegas-based financial consulting firm.

Meanwhile, stocks in the major gaming equipment manufacturers slid somewhat, due in part to less-than-stellar earnings reported by market leader International Game Technology.

Still, as a whole the index climbed 3.6 percent, the fifth consecutive month with an increase. As a comparison, the S&P 500, when computed on an equivalent basis, dropped 1.4 percent in January.

Brian Gordon, a partner in Applied Analysis, said Caesars' announcement Jan. 18 that the company expects earnings per share to be several cents higher than previous estimates when fourth-quarter earnings are reported on Feb. 10, helped the stock price of MGM Mirage increase almost 9 percent during the month.

Caesars based its new projections on better-than-expected results in Las Vegas and Atlantic City. If one Strip company is doing well, then it is expected that others with Strip properties would also have good results, analysts said.

"Some of those estimates were based on room rates, which would reflect well for MGM Mirage," Gordon said.

The company, whose $7.9 billion merger with the Mandalay Resort Group is expected to close by the end of March, will announce its fourth-quarter earnings this morning. On Monday, MGM Mirage closed at $71.81, down $1.04, or 1.43 percent.

The Caesars announcement didn't help Harrah's Entertainment, which has a pending agreement to purchase Caesars for $9.4 billion that is expected to be completed by June. Harrah's stock price was up 0.59 percent during the month.

Gordon said Harrah's operates just one resort -- Harrah's Las Vegas -- on the Strip, and another -- the Rio -- within close proximity, which is the primary reason behind the purchase of Caesars.

Harrah's, which announces its fourth-quarter earnings Wednesday morning, closed Monday at $63.24, up 96 cents, or 1.54 percent. Caesars closed Monday at $19.33, up 14 cents, or 0.73 percent.

Station's year-end results, in which the company grew earnings more than 14 percent over 2003, not only showed the sector's muscle, but the soundness of the Las Vegas market, Gordon said. Station also upped its previously stated guidance -- estimated earnings per share -- for the rest of 2005 and into 2006.

"Station's performance in the Las Vegas locals market was impressive," Gordon said. "The company is currently trading at in excess of nine times their projected 2005 cash flow. Clearly, residential expansion in the Las Vegas market, along with the rising home values and related wealth, has positively impacted the operator."

Station Casinos closed Monday at $61.50, up $1.05, or 1.74 percent.

Reno-based IGT saw its stock price decrease 5.45 percent during January and 10.43 percent since January 2003. The company closed Monday at $31.30, up 41 cents, or 1.33 percent.

"(IGT) posted fiscal first-quarter results that were on par with expectations, but provided softened guidance for the balance of the year," Gordon said. "Overall, revenues and cash flow were up, but domestic sales were somewhat relaxed While IGT's stock reflected the softened outlook, long-term value still remains for this game-maker."

In addition to positive earnings announcements, news overseas in January could fuel the gaming stocks into the year. In Great Britain, one of the country's government houses passed legislation permitting 24 new casinos. The matter is still up for debate in the other house. In Singapore, several operators, including MGM Mirage, Harrah's and Las Vegas Sands, said they were looking at the international destination.

"Look for strong earnings reports in early February," Gordon said. "At the same time, we expect the cycle of profit-taking to commence, which will likely dampen the pricing growth witnessed in the past several months."

Casino Revenue: Gaming Stocks Start '05 Strong is republished from