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Rod Smith

Analysts Expect More Good News for Vegas Groups

7 October 2005

LAS VEGAS -- Major Las Vegas gaming operators finished the third quarter with never-before-seen profits and historic growth, thanks to surging demand fueled by the opening of Wynn Las Vegas, analysts said this week.

"The numbers we're looking at represent phenomenal growth rates, not likely to be duplicated in any other industry," said Brian Gordon, a partner in Las Vegas-based financial consulting company Applied Analysis.

MRC Group Chief Executive Officer Jim Medick called the overall 70 percent increase in revenue "off the charts," and said the statistics confound historic comparisons.

Deutsche Bank analyst Marc Falcone said the numbers walloped Wall Street expectations, thanks largely to the boost in attention from the opening of Wynn Las Vegas, increasing room prices, surging occupancy rates, expanding entertainment offerings and accelerating convention business.

"We view the long-term growth rate for Las Vegas being in the mid-single-digit range. That takes out the bumps from the opening of new properties," he said. "But as Las Vegas continues to reinvent itself with new products over the next five years, we expect to see Las Vegas continue to grow. I don't see any slowdown in Las Vegas (in that time frame) whatsoever."

Revenue soared 70 percent to $5.8 billion in the quarter ended Sept. 30, from $3.4 billion a year earlier for Boyd Gaming Corp., Harrah's Entertainment, Las Vegas Sands, MGM Mirage, Station Casinos and Wynn Resorts.

The 70 percent growth came on top of 45 percent growth the year before.

Net income for the Big Six Las Vegas-based gaming companies increased in the third quarter to $520.2 million, up 65 percent from $315.3 million a year ago. Cash flow -- or earnings before interest, depreciation, taxes and amortization -- increased to $1.7 billion, also up 70 percent from $1 billion in the 2004 third quarter.

Fast-growing Penn National Gaming, a Wyomissing, Pa.-based casino operator, had revenue of $390.2 million in the third quarter, up 36 percent from $287.6 million a year earlier. Its income was $31.4 million, up 33 percent from $23.6 million in the third quarter of 2004. Its cash flow was $100.9 million, up 39 percent from $72.4 million.

Falcone cautioned that the financial estimates do not account for the full effect of the hurricanes that hit the Gulf Coast.

Still, Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas, said: "The industry is doing very well, the pie is getting bigger, and the Big Six are getting an extra slice or two from the bigger pie, probably due to marketing efforts."

The megamergers of Harrah's Entertainment and Caesars Entertainment and MGM Mirage and Mandalay Resort Group, completed earlier this year, are helping the surviving companies enjoy economies of scale, he said.

University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, said: "We are the dynamic gaming jurisdiction worldwide. Our only single jurisdiction competitor is really not a competitor because Macau appeals to new Chinese casino players who are not now coming to Las Vegas, but may soon do so after our Far East casino owners get their hands on them. The spread of casinos elsewhere will only feed more Las Vegas gambling."

Gordon said several factors combined to drive the record growth.

"Wynn (Las Vegas) had a lot to do with popular interest in the Las Vegas product, driving demand for visits, even though we can't quantify it because of the absence of previous-year data," he said.

The $2.7 billion Wynn Las Vegas opened April 28, and the third quarter was its first full quarter of operation.

"Strong convention and business travel during the quarter (also) provided a boost to overall visitation estimates," he said. "We know that the initial World Market Center event was well-attended in July 2005 and was incremental to the convention calendar."

Substantial revenue came from adding hotel rooms.

"The Augustus Tower at Caesars, the Spa Tower at Bellagio and Wynn Las Vegas all contributed to increased supply, which increased potential customer volumes at existing facilities," Gordon said.

Corporate consolidations increased efficiency and profitability, Gordon said.

"Several items that contributed to increased profitability include the elimination of duplicative positions at newly merged companies, the evolving systems integration process, leveraging marketing efforts across multiple units and various other company efficiencies," he said.

Gordon said local casinos were able to continue pressing forward because of growth in population and employment, stable home pricing and increasing personal incomes.

"For the local casino segment, a 5 percent growth rate in the number of residents and 7 percent growth rate in employment provide an instant expansion of the consumer base," he said. "Plus, rising personal income levels and real estate values that have held their new levels provide increased wealth potential for residents, and likely, increased consumer spending."

Medick said the question now is whether the performance is sustainable.

"While there is tremendous upside potential, the question of sustainability will be tested by the ability of airlines to absorb the volume and increase the number of flights necessary for Las Vegas to offset the potential impact of gasoline prices," he said.

Thompson said Las Vegas is in for a lull between the opening of new resorts, with only Station Casinos' Red Rock Resort and Boyd Gaming's South Coast set to open in the next year.

He said tourist fatigue is likely to set in if every entertainment production costs $150 a ticket and room rates keep increasing.

"Tourist stupidity isn't so deep that people can't figure that putting 245 credits in a 'penny' slot machine is not playing a penny slot machine," he said.