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Gaming Guru

Rod Smith

Economists: Las Vegas Economy Improving

8 April 2004

LAS VEGAS - Profits at the major, publicly traded Las Vegas-based gaming companies jumped an estimated 28 percent in the first quarter of 2004, signaling further improvements in the local economy, local economists said Wednesday.

Net income for the top six gaming operators -- Harrah's Entertainment, Caesars Entertainment, MGM Mirage, Mandalay Resort Group, Boyd Gaming Corp. and Station Casinos -- increased to an estimated $318 million from the 2003 first quarter, thanks to continued cost cutting, surging leisure travel and growing convention business, Wall Street analysts said.

"Las Vegas is nearly unexplainable. The demand (growth) has been the best I've seen in five years and I would anticipate every company to beat (these) earnings estimates (in their final reports) this month," Deutsche Bank analyst Marc Falcone said.

The profit estimates are good news for local workers, too.

Keith Schwer, director of the Center for Business and Economic Research at University of Nevada, Las Vegas, said the underlying gaming industry fundamentals also should spell accelerating growth for the local economy, helping to protect local workers against job losses and encouraging wage increases.

In addition, the improved revenue picture should feed state coffers even though the performance of the state's casinos was not the strong point for operators.

"The national economic fundamentals of the gaming industry are important (for the whole local economy). A rising tide lifts all the boats," Schwer said.

"What you're really seeing in the first quarter is the gaming industry has picked up and that's tied to the national economy, disproving the conventional wisdom that Las Vegas is inflation- and recession-proof," Schwer said.

Schwer cautioned that local economic growth has been driven by construction since the Sept. 11, 2001, terrorist attacks rather than by the gaming industry.

But now, the national economy is picking up steam, which is reflected in casino industry profits, which in turn should accelerate growth in the local economy as it kicks alongside the ongoing construction boom.

While gaming profits were up sharply in the first quarter, combined revenues increased to $4.4 million, up a more modest 2.1 percent.

Cash flow, another key measure of profitability, increased to an estimated $1.3 billion for the six industry leaders, up 9.2 percent from the same period a year ago largely because of demand for destination vacations and building convention business which is stealing events from other cities, said Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said that was because company profits were driven by cost cutting, lower interest rates and debt refinancing.

In addition, management has been keeping a watchful eye on human resources expenditures since the economic downturn precipitated by the Sept. 11 attacks, which has also led to cost cutting, Gordon said.

"That's evident in the incremental profitability of the hotel side with increasing room rates," Gordon said. Hotel operators don't have to hire additional chamber maids when they simply increase room rates dramatically as they did in the first quarter.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said the refinancing and room rate trends have magnified the impact of revenue growth on profits.

Still, Hausler said the gaming industry fundamentals are not only good, but are getting stronger, and the companies have not yet hit their peak profit margins.