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Analysts More Optimistic on Las Vegas Properties

10 January 2002

by David Strow

LAS VEGAS -- MGM Mirage was raised to a "strong buy" by a prominent gaming analyst this morning, who cited optimism that fundamentals at the company's five Las Vegas Strip properties are improving more quickly than expected.

Robertson Stephens analyst Harry Curtis previously had a buy rating on the stock. An assumption of $1.2 billion to $1.25 billion in 2003 cash flow suggests MGM Mirage stock should hit $37 to $39 in the next 12 months, a gain of more than 25 percent, Curtis wrote in a research note.

"Based on conversations with tour and travel operators, and on our in-house proprietary room rate surveys, we believe room rates at MGM's Las Vegas properties are returning to 'full pricing,' i.e., rates that are in line with last year," Curtis wrote. "If MGM is successful in re-establishing higher rates, other major operators on the Strip are likely to follow suit, in our opinion."

MGM Mirage stock rallied this morning on the upgrade. It rose 99 cents to $30.88 by midday, a gain of more than 3 percent.

MGM Mirage was not the only stock analysts are bullish on. In separate actions, Merrill Lynch and Bear Stearns raised their fourth-quarter earnings estimates for Harrah's Entertainment Inc., following strong December win numbers from Atlantic City and several Midwestern gaming markets.

This morning Merrill Lynch gaming analyst David Anders raised his fourth-quarter estimate to 40 cents per share, up from 37 cents per share. On Wednesday, gaming analyst Jason Ader of Bear Stearns raised his estimate to 39 cents per share from 35 cents per share, and hiked his fourth-quarter cash flow estimate to $218 million, up $6 million.

Both analysts cited the same motivation -- strong gaming win results from Atlantic City and the Midwest. Atlantic City posted gaming win growth of 18 percent in December, while Missouri, Illinois and Iowa all reported growth exceeding 20 percent. Harrah's operates casinos in all four areas.

Harrah's fell 27 cents to $39.48 in this morning's trading, after reaching a 52-week high of $40.15 Wednesday.

The strong Midwestern results prompted Anders to hike estimates on other operators as well. Merrill Lynch raised its fourth quarter estimate on Argosy Gaming Co. from 56 cents to 60 cents per share, and on Ameristar Casinos from 35 cents to 38 cents per share.

Earlier this week, Bank of America Securities gaming analyst J. Cogan raised his 12-month price target on Station Casinos Inc. from $12 to $14, following news that the U.S. Department of Interior planned to place a 49-acre land parcel near Sacramento into trust for the United Auburn Indian Community. Station has a deal with the Auburn tribe to develop a casino on the site.

Cogan said he believes the new casino could open in 2003, and could generate $20 million to more than $50 million in cash flow for Station.

Separately, Prudential Securities re-initiated coverage of the gaming industry Wednesday, with initial coverage of eight gaming companies.

Analyst William Lerner placed "buy" ratings on Harrah's, Park Place Entertainment Corp., International Game Technology and WMS Gaming. Lerner put hold ratings on MGM Mirage, Mandalay Resort Group, Station Casinos and Argosy.

Lerner set target prices of $50 for Harrah's, $33 for MGM Mirage, $13 for Park Place, $22 for Mandalay, $12 for Station, $86 for IGT, $28 for WMS and $33 for Argosy. The targets set for Mandalay, Station and Argosy are below those stocks' current trading levels.

"With no major domestic commercial expansion likely in the medium term, we believe the industry is at an inflection point -- between a period of significant investment and a period of harvest -- marked by an unusual combination of events in 2001," Lerner wrote. "We expect the harvest phase to be defined by historically low revenue growth, yet with unprecedented free cash flow growth."

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