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Best of Howard Stutz

Gaming Guru

Howard Stutz

Gaming stocks see a January jolt

1 February 2010

LAS VEGAS, Nevada -- Gaming stocks started off the year with a bounce as investors anticipated fourth-quarter earnings and casino watchers tried to gauge the impact of the recently opened CityCenter on Las Vegas.

On a whole, seven of the 10 publicly traded casino operators and slot machine manufacturers charted by Las Vegas-based financial consultant Applied Analysis saw an increase in their average daily stock price during January compared with December.

MGM Mirage had the largest increase, almost 15 percent. Wall Street analysts upgraded their views of the company in light of the December opening of its $8.5 billion CityCenter, which includes Aria, the project's 4,004-room hotel-casino centerpiece.

On Thursday, MGM Mirage Chairman and Chief Executive Officer Jim Murren told the Preview 2010 audience that Bellagio -- the hotel-casino analysts feared would be hurt by Aria -- continues to improve its year-over-year performance.

"Cannibalization concerns in Las Vegas persist, but there are some signals the higher-end of the market is weathering the economic storm better, particularly as the public markets have reported relatively strong rises off the bottom," Applied Analysis principal Brian Gordon told the company's clients Friday.

The Applied Analysis Gaming Index rose 12 points in January to close at 298.23.

Most of the major casino operators, including MGM Mirage, Las Vegas Sands Corp. and Wynn Resorts Ltd., are expected to report fourth-quarter earnings in February.

"(The) earnings season will provide additional insight on recent performances and increased visibility on the sector," Gordon said.

The biggest decline among the companies charted by Applied Analysis belonged to regional casino operator Pinnacle Entertainment, which had its average daily stock price fall almost 12 percent in January.

The Las Vegas-based company went through a management shake-up in November and changed CEOs. The company also scaled back plans for a casino expansion in Lake Charles, La.

Last week, Missouri gaming regulators moved to revoke the casino license for Pinnacle's President Casino in downtown St. Louis, one of two casinos the company now operates in the market.

In January, the three major slot machine manufacturers, International Game Technology, Bally Technologies and WMS Industries, all saw their average daily stock prices increase compared with December.

The three companies also posted quarterly earnings with varying degrees of success in the challenging three-month October-to-December period.

Goldman Sachs gaming analyst Steven Kent told investors Bally's and IGT's results were largely driven by cost savings and both companies seemed to suggest that replacement sales seem to be coming in slower than expected.

In contrast, WMS reported positive December results and seemed to be gaining market share while keeping the interest of casino operators that were potential game buyers.

"We suspect that slot stocks may take a pause after quarterly earnings until we see greater visibility on state expansions of gaming or operators publicly commit to buying more replacement machines," Kent said.

Another analyst, Morgan Joseph's Justin Sebastiano, said IGT's stock price has slid 14 percent since the company reported earnings in the middle of the month, which makes the slot machine giant an attractive buy.

Sebastiano said he has been bullish on Bally and WMS while remaining cautious about IGT. It appears, he said, that IGT had turned the corner and would benefit just as greatly as Bally and WMS from an improved replacement cycle.

"The knock against IGT for the past few years has been that they took their eye off the ball regarding game content," Sebastiano said. "We started to warm to the name following its showing at (the recent global Gaming Expo). We think IGT's game content is light years ahead of where they were two years ago."