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Rod Smith

Casino Stocks: Gaming Index Soars

5 April 2004

The average value of Las Vegas-based gaming stocks surged by a record amount to hit an all-time high in March, beating all the broad market indicators in the process, analysts said Friday.

The Applied Analysis Gaming Index soared to 254.64 in March, up 79 percent, or 112.8 points, from 141.87 a year earlier, and up 8.6 percent for the month or 20.2 points, compared with February.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said the index increased by the largest amount and the largest proportion since it was launched in 1998.

Deutsche Bank analyst Marc Falcone called the market performance "unbelievable," and said gaming stocks are enjoying the best run they have seen in more than five years.

By comparison, Standard and Poor's 500 Index increased 33 percent to 1,126.21 at the end of March, up from 848.18 at the end of March 2003.

"Gaming stocks are beating the tail off every comparable index," said Eric Hausler, gaming analyst for Susquehanna Financial Group. "Earnings are good. There's good news over the horizon like out in California. And Las Vegas is really hot. It was a great first quarter (for gaming companies)."

California Gov. Arnold Schwarzenegger is negotiating with tribes to add $1 billion to state coffers by letting tribes have as many slot machines as they want in return for a graduated fee.

Analysts credited gaming fundamentals for the first-quarter performance in addition to the national economic recovery, booming leisure travel and convention business. They also anticipate that gaming will proliferate to new jurisdictions next year.

"During the month of March, we had relatively strong improvements in the national economy with increases in disposable income as well as business activity, leading to increased leisure, convention and business travel (to Las Vegas)," Gordon said.

Goldman Sachs analyst Steve Kent said consumer spending and leisure travel have been very strong.

"Las Vegas operators get the benefit of more consumers (and business travelers) who want to spend time in a vacation destination," he said.

Joe Greff, gaming analyst at the independent Wall Street research firm Fulcrum Global Partners, said strengthening economies in regional and riverboat markets, good weather and easy comparisons with the 2003 period that includes the buildup to the war with Iraq also boosted gaming stock values.

Hausler and Kent added that state legislatures have been benign this year toward taxing gaming operators, erasing the threat of higher taxes that dragged stocks down last year.

Analysts said the bubble is unlikely to burst as long as operators can effectively manage the balance between room inventory and demand.

"There's always a concern when you have record high stock prices as to how much higher they can go, and we're looking at soft comparisons with the last year given the Iraq war situation," Gordon said. "Comparisons are going to get more difficult later in 2004, and the stocks should remain relatively healthy and we should see a robust 2005 with the opening of Wynn Las Vegas and Caesars Palace finishing its new tower."

However, Kent said there has been no slowdown in gaming fundamentals and that the industry and share values are likely to keep growing.

"I'm not sure you'll match the performance of the first quarter, but select stocks should continue to do well," he said.

And Falcone said based on very strong fundamentals in Las Vegas, there are no signs the trend will slow in coming months.

Station Casinos and Caesars Entertainment led Las Vegas-based companies.

Investors found Station attractive because of its performance records, future expansion plans and strong cash flow, which has led the company to increase its dividend by 40 percent this month, Gordon said.

Station closed the month and the quarter with an all-time high stock price of $44.17.

They also favored Caesars after it increased its guidance for first-quarter results early in the month.

Caesars' increased profitability was driven by higher-than-expected room revenue in Las Vegas and higher-than-expected table revenue nationwide.

Caesars closed the month and the quarter with a 52-week high stock price of $13.15 a share.