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Rod Smith

Big Companies Profits Up

22 July 2005

LAS VEGAS -- The Big Six gaming companies should report second-quarter profits more than 50 percent higher than a year ago when they start posting financial results next week, Wall Street analysts said Wednesday.

Boyd Gaming Corp., Harrah's Entertainment, Las Vegas Sands Corp., MGM Mirage, Station Casinos and Wynn Resorts Ltd., are likely to have tallied more than $400 million in combined net income, they said.

Wall Street bankers said the Big Six are likely to report revenue of $4.5 billion in the 2005 second quarter, up from $3 billion a year earlier and just shy of the record first-quarter revenue of $4.7 billion.

The companies likely will report combined profits for the quarter of $440 million, up from $273 million in the second quarter of 2004, and cash flow -- earnings before interest, depreciation, taxes and amortization -- of $1.3 billion, up from $929 million in the first quarter of 2004.

Deutsche Bank analyst Marc Falcone said the MGM Mirage merger with Mandalay Resort Group and the Harrah's Entertainment merger with Caesars Entertainment, coupled with strong trends in the Las Vegas locals and regional markets, explain the improved performance.

"Overall, it was a strong quarter, with (Las Vegas) Sands benefiting from strong trends in Las Vegas and sequential improvement in Macau and Wynn (Las Vegas) exceeding expectations," he said.

Las Vegas Sands, a newcomer to the Big Six since going public early this year, led in growth.

"Macau Sands (which opened off the coast of China a year ago) clearly made the difference. Macau is amazingly strong and Macau Sands is doing as well as any property in the gaming universe," Deutsche Bank analyst Andrew Zarnett said.

He said The Venetian, which Las Vegas Sands owns and operates, is benefiting from the same long-term growth trends that are aiding all Las Vegas operators and from foot traffic from Wynn Las Vegas.

"The Venetian once stood at the end of the Strip. Now it stands at the center because Wynn is pulling thousands of people a day up to the new end of the Strip," he said.

Zarnett said each of the other major gaming companies, all based in Las Vegas, did well individually in the quarter. And, he said, there's room for an upside surprise from Boyd Gaming Corp. and Kerzner International Ltd., a Paradise Island, Bahamas, company that's not in the Big Six.

"The numbers from MGM and Harrah's are more difficult to interpret because they just completed their mergers (with Mandalay Resort Group and Caesars Entertainment respectively)," he said.

MGM Mirage's net income, in particular, reflects higher interest expenses attributable to the merger that closed during the quarter.

"Especially for companies that are Las Vegas-centric, visitation, occupancy and room rates were all up," Zarnett said. "Add to that, the U.S. economy is performing as ell as it has at any time in the past four years."

And the opening of Wynn Las Vegas gave the entire destination a boost following its April 28 opening as visitors came to gawk.

"Wynn is doing better than expected," Zarnett said. "On every metric for that property, there are clear indications of the early success it is having."

Bear Stearns gaming analyst Joe Greff said in an investor advisory that the Las Vegas locals market is particularly robust, driven by population increases in Clark County, low unemployment in Las Vegas and the strong real estate market.

Falcone said the growth is likely to continue well past the end of the year, especially with synergies from the big mergers and other growth opportunities.

"We have a good conviction the growth story remains in place continuing into 2006, and we think 2007 will be a breakout year for the gaming industry because of all the new products coming online," he said.

Zarnett said booming visitation by retirees and preretirees -- baby boomers -- is driving growth.

"These people are looking for vacation destinations, and Las Vegas is at the head of their lists," he said.

MRC Group Research Institute Chief Executive Officer Jim Medick said the baby boom phenomenon is both enlarging and diversifying the market. What was once a gaming mecca for adults has been transformed into a visitor destination in which entertainment is the main ingredient and gaming is like dessert, he said.

"Las Vegas demographics clearly show the median age is trending younger (by five years), is spending a higher percentage of their budget on entertainment and shopping, and come to Vegas for the Full Monty and not just gambling," Medick said. "This younger-entertainment trend will continue into the future and is supported by the media coverage of new properties and new hip clubs."

Whether gaming companies' recent financial success foretells prosperity for Las Vegas is debatable, University of Nevada, Las Vegas history professor Hal Rothman said.

"These earnings may be a harbinger of a brighter future or just a reflection of the opening of Wynn Las Vegas in April," he said. "The opening of Wynn Las Vegas played out perfectly for the city. It was a tremendous boost for the destination with little investment.

"Whether Las Vegas enjoys a miniboom and retiring baby boomers flock here for vacations and new homes, or whether it was a one-time phenomenon, remains to be seen."