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Analysts Mixed on Mandalay, Other Operators

6 March 2002

LAS VEGAS -- Mandalay Resort Group was upgraded to a "buy" by investment house Robertson Stephens on Friday, a day after the company posted a loss for the quarter ending Jan. 31.

Mandalay reported a loss of 10 cents per share prior to one-time charges. However, Robertson Stephens analyst Harry Curtis focused on positive remarks made by company officials on a conference call with investors.

Curtis noted that Mandalay's room rates could return to last year's levels as early as March or April, and hiked his estimate for the fiscal year ending Jan. 31, 2003, from $1.30 to $1.70 per share. Curtis estimated the stock would reach $38 within 12 months, and said it could potentially trade as high as $44 to $55 per share if investors are willing to pay a higher price-to-cash flow multiple for the stock.

Room rates are seen as particularly crucial to Mandalay, which operates more hotel rooms on the Strip than any other casino operator.

Separately, Banc of America Securities analyst J. Cogan set a target of $33 for the stock, and raised his fiscal 2003 estimate from $1.40 to $1.45 per share. Cogan also said he believed Mandalay's price-to-cash flow multiple will rise, based on the Strip's rebound in business, Mandalay Bay's new convention center and "investors' increasing focus on the cash-generating gaming sector."

Prudential analyst William Lerner also raised his estimates on Mandalay, hiking his first-quarter estimate from 22 cents to 44 cents per share, and his fiscal year estimate from $1.26 to $1.67 per share. Lerner maintained a "hold" rating, but said the convention center could be "the major catalyst" for Mandalay.

"Noteworthy, quantifiable indications, based on advanced bookings, that the (convention center) initiative looks to be successful could prompt us to get more aggressive from here," Lerner wrote.

Mandalay hit a 52-week high Monday, closing at $32.35 -- an increase of more than 10 percent over its Thursday close. The stock fell 85 cents Tuesday to close at $31.50.

Separately, CS First Boston lowered its rating for the gaming sector from "market weight" to "underweight" this morning, triggering a decline in major Las Vegas casino stocks.

An underweight rating is a recommendation that investors hold a lower proportion of gaming stocks in their portfolios than is represented in the S&P 500 index.

Gaming analyst Brian Egger cited three factors behind the downgrade: a 93 percent run-up in gaming stock prices since their post-Sept. 11 lows; decelerating gaming revenue growth in the midwest; and a projection from CS First Boston economists that investors may soon move money away from consumer cyclical stocks.

"We believe it is unrealistic to expect a resurgent consumer economy to stimulate further acceleration in gaming demand because the economy's deterioration last year did not precipitate a fall-off in gaming-related spending," Egger wrote.

The only gaming stock specifically downgraded was Harrah's Entertainment Inc., which was lowered from "buy" to "hold." MGM Mirage was affirmed at a "buy," while Mandalay Resort Group was kept at "hold."

The Harrah's downgrade "reflects a moderately greater degree of caution regarding the prospect of decelerating (revenue) growth in key Midwestern markets, which have been buoyed recently by favorable weather conditions and consumers' proclivity to visit leisure destinations accessible by automobile rather than airplane," Egger wrote. "As travelers take to the skies in greater numbers, we expect this substitution effect to begin to dissipate."

Las Vegas' largest casino operators were all trading down this morning following the report. Harrah's fell $1.52 to $41.69, Park Place Entertainment Corp. dropped 43 cents to $9.61, MGM Mirage lost 72 cents to trade at $35.95, Mandalay retreated 37 cents to $31.13, Station Casinos Inc. dropped 30 cents to $13.30, and Boyd Gaming Corp. was off 70 cents to $10.79.

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