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Analysts Cautious About Nevada Casino Recovery

13 November 2002

by Liz Benston

LAS VEGAS --Wall Street analysts remain cautious about the recovery of Nevada's casino industry despite healthy increases in statewide gambling revenues and Strip gambling revenues in September compared to the same month a year ago.

The increases -- which were in line with third quarter earnings results reported by major casino operators -- are driven by easy comparisons to September 2001, when casinos were profoundly hurt by the terrorist attacks that hurt the tourism industry.

Leisure travel remains below year-ago levels and convention business -- a segment that typically demands higher rates -- isn't immune to price wars, analysts said.

High rollers still haven't returned in force to Nevada, where baccarat revenues are down dramatically from the fallout of September 2001.

"Given a fairly strong special event calendar, which included the De La Hoya-Vargas fight (at Mandalay Bay), we would have expected a stronger turnout in the market from high-end table customers, particularly against easy 9-11 comparisons," said Marc Falcone, a gaming equities analyst with Deutsche Bank Securities.

Tuesday, the Gaming Control Board reported a 6.1 percent increase in state gambling revenues -- the amount won from gamblers -- in September compared to the same period last year and a 7.5 percent increase in Las Vegas Strip casino revenues. Statewide baccarat revenue slipped 32 percent from September 2001 and was down nearly 35 percent on the Strip, dragging down the table game category. Slot revenues rose 8.6 percent statewide and 13.7 percent on the Strip.

Total revenues were $810.1 million, $46.4 million more than September 2001 but yielding a shortage of nearly $17 million in gambling tax revenues the state had projected for fiscal year 2003. This follows a $31 million shortfall in fiscal year 2002.

Gambling revenues increased more modestly compared to 2000 figures, which exclude the Sept. 11 comparison, analysts said. Yet even comparisons to September 2000 are tricky, as gambling revenues fell 9.4 percent that month.

Statewide gambling revenues grew 2.8 percent compared with September 2000 and Strip gaming revenues grew 1.7 percent during the same period. Slot revenues rose 3.5 percent despite a decline in coin volume.

A comparison of "total drop" -- or the total amount wagered -- shows a decline of 6.1 percent compared to September 2000. Total slot drop was down 1.5 percent from two years ago.

The 6 percent decline is "at the lower end" of the 1 percent increase to 8 percent decline range in that category since March, Lehman Brothers gaming analyst Joyce Minor said.

"This confirms to us that September was indeed a bit soft, as expected," Minor wrote in a research note to investors.

John Kempf, a bond analyst with Goldman, Sachs & Co., said the modest revenue increases from 2000 can partly be explained by the fact that casino operators have since put greater emphasis on catering to convention-goers to boost occupancy and room rates.

"The convention segment is traditionally a weaker gaming customer," Kempf wrote in a research note.

The U.S. and global economies were also faring better two years ago and were not feeling the lingering effects of Sept. 11, he said.

Andrew Zarnett, a bond analyst with Deutsche Bank Securities, said it can be difficult to give weight to state gaming revenue data because the numbers are released so far behind what companies have already reported.

Zarnett said he is looking ahead to projected improvements in the fourth quarter.

"Greater discounts to prop up occupancy and a softer convention business will continue to put pressure on (revenues per available room)," which could also hurt gaming revenues, he said.

A pickup in convention activity and a strong special events calendar should improve the outlook for Las Vegas, Falcone said.

In particular, MGM Mirage -- which is best positioned to gain market share in the high-end gambling segment as the economy improves -- and The Venetian casino resort did well in September, he wrote in a research note.

Park Place Entertainment Corp. likely had a difficult month, particularly at its Caesars Palace casino, he noted.

Nevada should expect favorable comparisons from 2001 for the next few months, analysts said.

Strip casinos are experiencing healthy increases in room rates in late November and early December compared to a year ago, according to a survey conducted for Bear, Stearns & Co.

Average weekday rates across the Strip for the first week of December soared by about 27 percent, to $96, yet were still down about 15 percent from 2000 rates, Bear Stearns gaming analyst Jason Ader said. Average weekend rates rose 38.5 percent, to $171 -- an increase of 14.5 percent over 2000's average weekend rate of $150. December increases are driven primarily by the National Finals Rodeo and the NFR Cowboy Christmas Gift show, events expected to draw about 300,000 people to Las Vegas, Ader said.

Shares of most major gaming companies rose today, following a Tuesday market rally.

Fears of declining consumer spending have caused some recent weakness in gaming stocks and some downgrades by analysts. Most notably, several analysts downgraded shares of Strip casino operator Mandalay Resort Group this month on concerns that sluggish consumer spending could hurt the company, which is reliant on more budget-conscious rooms for individual travelers.

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