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Rod Smith

Big Six's Earnings Soar 40 percent in '04

17 January 2005

With the top six gaming companies about to report that their combined earnings are up more than 40 percent, analysts are predicting the Las Vegas gaming industry is entering the largest expansion in at least five years.

"We think Wall Street is very willing to loan the sector money right now, given the strong performance the individual companies are experiencing plus the enormous benefits consolidation is bringing -- synergies and cost-cutting opportunities," Deutsche Bank analyst Marc Falcone said.

He bases his opinion on the industry's 2004 revenues, which are estimated to reach a combined record $18.9 billion, up 8 percent from $17.5 billion the year before for the top six operators: Boyd Gaming Corp., Caesars Entertainment, Harrah's Entertainment, Mandalay Resort Group, MGM Mirage and Station Casinos.

"Overall, revenue growth was better than expected, partly because of strong (room) demand in Las Vegas, which we continue to see, and stronger nongaming growth," Falcone said.

The companies' combined income increased 41.4 percent, to $14 billion in 2004 from $990 million in 2003. Cash flow -- or earnings before interest, depreciation, taxes and amortization -- increased 26.2 percent to $5.3 billion, compared with $4.2 billion the year before.

Falcone said the results reflect the benefits of cash-enhancing initiatives, such as added hotel towers; less-costly, better-run businesses; and debt refinancing at lower interest rates.

Keith Schwer, director of the University of Nevada, Las Vegas' Center for Business and Economic Research, called the results, which the companies are expected to announce over the next two months, "unique" and "really amazing."

Previously, Las Vegas gaming companies have grown steadily around a trend line, with deviations depending on local and national developments.

"But if you look at 2004, there was a step function. It was as if performance went to a new plateau (in January) and growth just kept on improving from the higher base," Schwer said.

The industry's record performance accelerated throughout the year. In the just-ended fourth quarter, revenues increased 33 percent, to $4.8 billion from $3.6 billion a year earlier.

Combined income for the top six operators increased 45 percent in the quarter to $259 million, up from $178 million a year earlier. Cash flow rose 20 percent, to $1.2 billion from $1 billion.

Brian Gordon, a partner in Applied Analysis, a Las Vegas-based financial consulting firm, called 2004 a "blockbuster year" for the local gaming industry.

He said national trends, including a recovering economy, increased leisure travel and improved consumer confidence, drove increased activity on the Strip, which was key for the major operators.

Gordon also said the exposure Las Vegas received with five prime-time television series airing at once drove demand to new levels and helped create excess demand.

"Clearly, when we see average daily room rates increase week after week and over the whole year, there's excess demand," Gordon said.

Susquehanna Financial Group gaming analyst Eric Hausler said the opening of new hotel towers at existing resorts and added amenities gave top operators a major boost in 2004, even though no new megaresort was built.

The additions let the companies spread overhead over larger operations without adding major costs and dropped up to 70 percent of added revenues directly to the bottom line, he said.

He said cost savings following the Sept. 11, 2001, terrorist attacks, and technological changes, such as the shift to cashless slot machines, also buoyed profits.

Hausler and Gordon said stock repurchase programs the companies have operated for several years have increased their earnings per share and reduced their leverage, or debt relative to cash flow. Deliberately increasing their earnings per share has made the companies more attractive to investors, especially to national investors who weren't smitten with the gaming industry in the past.

Schwer said major gaming companies, because of their performance in 2004 and their resilience following Sept. 11, 2001, are in better position than ever to raise capital on Wall Street.

Big Six's Earnings Soar 40 percent in '04 is republished from