Casino Stocks: Station, Boyd Help Index to Fine February

The average value of gaming stocks soared to new records in February, up 76 percent from a year earlier, despite marked weaknesses in slot machine manufacturers' shares, analysts said Friday.

Station Casinos and Boyd Gaming Corp. led local operators because of their aggressive strategies aimed at the locals market, analysts said.

However, Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, warned that comparisons with last year could be misleading because the anticipated war with Iraq had caused market uncertainty and had depressed stock values.

Compared with January, the Applied Analysis Gaming Index climbed to 234.43, up 9.8 points, or 4.3 percent, for the month. Gaming operators' stocks increased 7.2 percent in the index, but manufacturers' shares were up only 2.6 points.

Gordon said the most recent stock performance resulted from record-setting wagering activity on the 2004 Super Bowl and other signs leisure travel to Las Vegas had recovered from the effect of the Sept. 11, 2001, terrorist attacks.

"Despite the NFL's attempts to limit Super Bowl parties and celebrations, gamblers came out in droves to bet on their favorite team. The most active sports-book day of the year reported over $82 million in wagers, with a healthy 15.3 percent take-home by the books," he said.

"We're continuing to see strong visitor volumes, the McCarran count was up 5.9 percent in January, table volumes were up 5.5 percent in December and, despite lackluster win rates, volumes are there. They all point to improving conditions for investors," Gordon said.

Furthermore, investors expect to keep seeing an improvement in operating companies in 2004 and a strong uptick in 2005.

Only International Game Technology among the lagging slot makers helped pull the industry average upward with its increase of 3.75 percent in value.

"The equipment companies have paused," said Eric Hausler, gaming analyst for Susquehanna Financial Group. "They had a great run last year and investors need some catalyst to motivate them from here."

Hausler said a U.S. Supreme Court decision on whether to hear a case fighting the expansion of Class II, or electronic bingo, machines on American Indian reservations is expected to be announced Monday and could prove to be the upward catalyst manufacturers' stocks need.

Hausler said a decision not to hear the case will boost manufacturers because it will spell uncurbed expansion of gambling on Indian lands.

UBS Warburg analyst Robin Farley, however, said a decision either way will boost the sector because uncertainty will finally be resolved about whether the machines can be banned by state laws.

Hausler said investors who are looking at manufacturing stocks, and to some extent shares in operating companies, "want to see new prospects for gaming expansion to push them further. They want to see movement in a big state to move the needle on earnings."

In February, however, strong earnings in Las Vegas, Atlantic City and, to a lesser degree, regional markets, drove gambling stock prices, he said.

"Investors are lining up because Las Vegas is really on fire, so they are piling into some gaming operators," Hausler said.

Companies such as Harrah's Entertainment and MGM Mirage are getting stronger boosts on the average "because they sat out last year's rally," he said.

For the rest of the year, Hausler said investors will expect earnings to improve before they invest any more money in the gaming industry.

"The group probably has another 15 percent to go, at least for select names, at least for now," Hausler said.

The Dow Jones Casino Index closed Friday at 398.98, up 3 percent for the week and almost 90 percent over the last 12 months. By comparison, the Standard & Poor's 500 Index closed at 1144.94, flat for the week but up almost 40 percent over the last 12 months, less than half the increase in gaming stocks.