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Gaming Guru

Howard Stutz

Casino Stock Index Increases for Second Straight Month

2 August 2005

The average daily stock prices of the gaming industry's major players rose collectively during July, giving the casino sector its second straight month of increases, according to a Las Vegas index.

As gaming companies report their second quarter earnings -- Boyd Gaming Corp., Station Casinos and MGM Mirage this past week; Las Vegas Sands Corp. and Harrah's Entertainment next week -- Wall Street is singing the industry's praises.

"We think second quarter results and guidance should quell investor concerns about a slowdown in Las Vegas," Deutsche Bank gaming analyst Marc Falcone said following MGM Mirage's earnings release; adding in regards to Station Casinos, "(The company's second quarter) results reaffirmed investor conviction in the Las Vegas locals market."

The Applied Analysis Gaming Index, a weighted average of nine gaming stocks compiled by the Las Vegas-based financial consulting firm, jumped 10 points in July, its second straight monthly increase following a three-month downward trend.

Brian Gordon, a partner in Applied Analysis who follows the gaming industry, said continued positive earnings reports from the casino companies should help the values in the index hold up in August.

Gordon said the gaming win, which was up 14.9 percent in Clark County in May, could also foretell good news for the industry. During the first two months of the second quarter, the gaming win on the Strip was up 10.4 percent and Gordon expects a similar, if not better, performance when June's gaming win totals are released.

MGM Mirage's average daily stock price rose more than 6.5 percent during July to lead the sector. Harrah's Entertainment saw its daily price jump 4.6 percent. Both companies grew in size substantially during the quarter through large mergers -- MGM Mirage closed its $7.3 billion buyout of the Mandalay Resort Group in late April while Harrah's completed a $9 billion purchase of Caesars Entertainment in the middle of June.

While gaming analysts anticipate good earnings when Harrah's reports Thursday, MGM Mirage's results, which included nine weeks of operating earnings from the Mandalay properties a record quarterly cash flow of $567 million, forebode upbeat news from the rest of the industry.

Susquehanna Financial Group gaming analyst Eric Hausler said MGM Mirage provided a robust outlook from the Mandalay purchase and overall business trends in Las Vegas.

"The stock responded well," Hausler said. "We remain positive on the near-term and long-term opportunities with the Mandalay acquisition and think the shares have another 10-15 percent upside from current levels. We maintain our positive rating on the stock."

Gordon said quarterly earnings from Las Vegas Sands Corp., expected Tuesday, will be a telling sign on Strip performance. He believes the company's Venetian resort benefited from increased customer foot traffic following the opening of Wynn Las Vegas in April.

Wynn Resorts Ltd., has told gaming analysts the company will not have a quarterly earnings conference call but will release earnings through its 10-Q, filed with the Securities and Exchange Commission, by Aug, 9. Gordon said interest is high in the company after it released results for the first 34 days of operation at the $2.7 billion Strip resort.

"At Wynn, we are still interested to compute their revenue figures for their second month of operations," Gordon said. "This will be well-scrutinized by investors."

Boyd Gaming was the only casino operator whose average daily stock price decreased, dropping 2.6 percent. However, the company's average daily stock price has jumped more than 103 percent from a year ago and its second quarter earnings, where cash flow grew 87 percent and overall revenues reached $554 million, were a positive sign for the local gaming players, including Station Casinos.

"Boyd's second quarter earnings confirmed the company is firing on all cylinders," Gordon said. "I think we'll see a positive return in August."

Station Casinos, which saw its average daily stock price jump 3.5 percent in July while reporting a 14 percent increase in second quarter revenues, continued to be buoyed by a strong local economy.

Falcone said the company, "has one of the most visible and impressive growth pipelines in the industry over the next 10-plus years." He raised his target price for the company's stock to $85 a share.

Hausler said the strength of the spending viability of the Las Vegas local customer market will welcome new properties next year when Station Casinos opens the $925 million Red Rock Station and Boyd Gaming unveils the $600 million South Coast.

"The population and economy in Las Vegas are growing at a healthy rate," Hausler said. "We think the market is strong enough to absorb this capacity, but we will continue to monitor the housing market in Las Vegas for any sign of a slowdown in the population growth in the region, which we have not seen at this point."

The manufacturing companies from the gaming sector remained the only down side for the index. Reno-based International Game Technology, which posted soft second quarter results in early July, saw its average daily stock price drop more than 1.5 percent in July.