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Best of Howard Stutz

Gaming Guru

Howard Stutz

Gaming stocks sink to 2003 levels

2 March 2009

LAS VEGAS, Nevada -- Gaming stocks sunk to levels during February that have not been visited since President Bush declared "mission accomplished" and Arnold Schwarzenegger was making movies rather than governing California.

The average daily share prices of nine of the 10 casino operators and slot machine manufacturers charted by Las Vegas-based financial consultant Applied Analysis slipped in value during the month. Six of the companies, led by MGM Mirage's nearly 52 percent decline compared to January, recorded double-digit drops.

"The latest performance within the gaming sector has aggregate values reaching levels not reported since 2003," Applied Analysis principal Brian Gordon wrote in his company's monthly report Friday.

The Applied Analysis Gaming Index slumped to 196.10, down 27.74 points from January's close.

Only regional casino operator Ameristar Casinos, which is based in Las Vegas but owns casinos in Midwest, Southern and rural Nevada markets, showed an increase in its average daily stock price in February, climbing 8.4 percent in value.

"Selected operators witnessed their stock price drop to all-time lows," Gordon said. "Market speculation suggests some are trading at price points that are more reflective of liquidation values, rather than operating entities generating millions of dollars of cash flow."

Wall Street has been concerned for several months that casino operators have enough cash on the balance sheet to navigate their companies during the current tough economy. Consumers have reduced discretionary spending, which in turn, has impacted gaming revenues and cash flow figures.

Wall Street investors have also soured on gaming companies while several analysts have told clients to avoid the sector.

In addition to MGM Mirage, Las Vegas Sands Corp. saw its average daily stock price fall 48.2 percent in February, shares of Wynn Resorts Ltd. were down almost 35 percent and Boyd Gaming Corp. was down almost 13 percent. During February, all three companies reported earnings-per-share losses in the fourth quarter.

"There is no question that liquidity and debt covenants are expected to create material challenges for many gaming companies, yet it appears that investors are prepared for worse-case scenarios," Gordon said. "For many, declining operating cash flow, more restrictive debt requirements going forward and capital requirements provide little visibility for an upside scenario."

Slot machine makers also were not immune to the sagging market conditions. International Game Technology, WMS Industries and Bally Technologies all saw their average daily stock prices hit double-digit declines.

Macquarie Securities gaming analyst Joel Simkins said growth for gaming equipment providers comes in new casino markets rather than existing jurisdictions.

"For the suppliers, although capital is currently constrained, we still see an opportunity for expansion as new states look to add gaming to generate job growth and tax revenues in coming years," Simkins wrote in a recent note to investors.