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Gaming Guru

Jeff Simpson

Las Vegas Lifts Gaming Stocks

24 February 2004

The power of the Las Vegas casino business is driving gaming industry stocks to near-record heights, industry experts said Monday.

Nevada-based casino operators and slot manufacturers are enjoying peak stock prices because investors understand the gaming industry's key fundamentals, two top Strip operators and a Wall Street analyst said Monday.

Deutsche Banc gaming industry debt analyst Andrew Zarnett said the casino business benefits from a couple of crucial factors.

"Gaming is supply constrained, as there's not enough slots and table games to meet demand, and the industry's dynamics lead to significant amounts of free cash flow," Zarnett said. "Those two factors are amazingly strong for investors."

Investors believe that the casino industry's resilience to the Sept. 11 terrorist attacks and the 2001 recession signals the safety of the industry's stocks, Zarnett said.

And that investor confidence resulted in a steady rise of industry stock prices.

Mandalay Resort Group President and Chief Financial Officer Glenn Schaeffer said most of the biggest Nevada-based operators do a lot of business in Las Vegas.

"Outstanding consumer demand, particularly on the Las Vegas Strip, drives the industry's superior (stock-price) performance," Schaeffer said. "The better companies have a big stake on the Strip."

MGM Mirage President and Chief Financial Officer Jim Murren said gaming investors often equate the Las Vegas outlook with the entire industry's prospects -- a simplification that benefits gaming stocks when Las Vegas is running on all cylinders.

"The gaming group's relative performance most often tracks people's perception of, and, subsequently, the performance of, Las Vegas," Murren said. "Las Vegas is the mother ship in gaming."

Statistics confirm the market's strength.

Las Vegas hotel rooms averaged a $82.48 daily rate in 2003, up 7.5 percent from a $76.69 rate in 2002, according to the LVCVA.

Annual visitation to the market increased to 35.5 million people in 2003 from 35.1 million in 2002 and 35 million in 2001, while December visitation hit 2.8 million in 2003, compared with 2.6 million in both 2002 and 2001.

The Strip reported $4.8 billion in gambling revenue in 2003, up from $4.7 billion in each of the prior two years.

Of the three companies with the most hotel rooms on the Strip, MGM MIRAGE and Caesars Entertainment have already reported fourth quarter results for 2003; Mandalay Resort is slated to report on March 4.

Excluding non recurring items, MGM MIRAGE reported $55.4 million in fourth quarter earnings, up from $42.5 million, while Caesars reported earnings of $13 million, down from $16 million.

A former top Wall Street analyst and now MGM MIRAGE's money man, Murren said casino operators are doing well because the economy's improving, Las Vegas is doing particularly well, and most of the big companies have significant assets in Las Vegas.

"The recovery of the U.S. economy is firmly under way," Murren said. "Few cities feel the recovery more than Las Vegas, and as the economy continues to improve, Las Vegas will continue to do better."