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Howard Stutz

Index Shows 2004 a Scorcher for Casino Stocks

4 January 2005

Gaming stocks closed 2004 with a flourish and analysts don't foresee future roadblocks that could slow the climbing prices.

Several casino issues had their average daily prices nearly double in the past 12 months, according to the Applied Analysis Gaming Index, a weighted average of local gaming stocks published by the Las Vegas-based financial consulting firm.

Events during December, such as the highly successful initial public offering by Las Vegas Sands Corp., and progress toward the expected 2005 first quarter closing of the $7.9 billion merger between MGM Mirage and Mandalay Resort Group, helped drive up the stock prices of several companies.

As a whole, the sector showed a larger percentage gain in both December and in 2004 than the Standard & Poor's 500, when the index is computed on similar basis.

"All the news that has come out on the industry has been positive, especially for Las Vegas," said Brian Gordon, a partner with Applied Analysis. "Visitor volume is strong and visitation numbers through McCarran airport continue to grow. This has helped to make gaming stocks white hot in to investors."

He said the Las Vegas Sands' IPO, in which The Venetian's parent company raised an estimated $744 million, helped increase the price of other casino operators. Sands Corp.'s stock price climbed 61 percent on its opening day of trading.

"When the valuation of Las Vegas Sands went up, other companies saw the value of their shares increase," Gordon said, referring to MGM Mirage and Wynn Resorts Ltd.

In the Gaming Index, Station Casinos (an 85 percent jump in its average daily price since December 2003), MGM Mirage (83 percent), and Caesars Entertainment (81 percent) showed the largest year-over-year increases.

In December MGM Mirage had the largest daily average increase, climbing almost 17 percent over November. Record third-quarter earnings from its buyout target, Mandalay Resort Group, and an upgrade in its target price by a Wall Street investment house, which said the company is worth $87 a share, drove the increase.

On Monday, MGM Mirage closed at $71.67, down $1.07, or 1.47 percent.

Jefferies & Co. analyst Larry Klatzkin said the industry had some of the highest pure percentage increases of any sector, outpacing the yearly percentage increases for the both the Dow Jones industrial average and the Nasdaq National Market.

He said gaming companies with large market capitalizations, including Harrah's Entertainment, Caesars Entertainment, Wynn Resorts, MGM Mirage and Mandalay Resort Group, grew 82 percent collectively in their stock price. Companies with the midsize market capitalization range had their stock prices grow a collective 132 percent.

"The industry is starting to approach the hotel group and other major sectors in terms of stock price," Klatzkin said. "Obviously, we're very positive about the gaming stocks."

On the manufacturing side of the Gaming Index, International Game Technology (2.5 percent) and Alliance Gaming Corp. (50 percent) showed decreases in their average daily stock prices in 2004. WMS Industries, however, showed an increase of 21 percent.

Aimee Marcel, an analyst who follows gambling-industry manufacturers for Jefferies & Co., said growth opportunities for IGT will come in 2006, when such jurisdictions as Pennsylvania are expected to bring the first of some 60,000 slot machines to the market.

"Alliance missed projections in three straight quarters and IGT didn't have the growth it had in the past," Marcel said. "That allowed other companies, like Shuffle Master and WMS to grow in different areas."

Gordon said the only speed bump ahead could be the recent slide in consumer confidence.

"Despite a one-month jump in December, the measure of how consumers feel about the economy slid consistently though the second half of 2004," Gordon said. "We find it increasingly difficult for current spending patterns to maintain double-digit growth levels while income levels fail to keep pace."

Index Shows 2004 a Scorcher for Casino Stocks is republished from