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Rod Smith

Gaming Companies Expected to Report Record Profits

14 April 2005

LAS VEGAS -- The top six gaming companies should report record profits of almost $500 million for the first quarter of 2005 when they start posting financial results next week, Wall Street analysts said Wednesday.

That would mark a 60 percent gain compared with the year before, a record rate of growth for Boyd Gaming Corp., Caesars Entertainment, Harrah's Entertainment, Mandalay Resort Group, MGM Mirage and Station Casinos combined, they said.

Susquehanna Financial Group gaming analyst Eric Hausler said the first three months of 2005 will prove to be a record quarter for many gaming companies, especially Las Vegas-based industry leaders.

"The trends in the (Las Vegas) locals market are certainly strong, the Strip is very strong and the regional markets are robust. Gaming continues to be gaining in popularity out there," he said.

Deutsche Bank analyst Marc Falcone said strong demand trends, especially for properties in Las Vegas, and the increased popularity of gambling have been driving the gaming industry and continue upward.

"It looks like this earnings season will continue the strength we've seen over the past few quarters, " he said. "The recent trends underscore the strength of the Las Vegas market."

Analysts based their projections partly on the industry leaders' 2005 first-quarter net income, which is expected to reach a combined record $466.1 million, up 61 percent from $290.3 a year earlier for the top six operators.

Earnings before interest, depreciation, taxes and amortization, or cash flow, increased for the six companies to $1.55 billion, up 15 percent from $1.35 billion in the first quarter of 2004.

The Big Six companies' revenue increased 10 percent to $5.2 billion from $4.7 billion.

Brian Gordon, a partner in Applied Analysis, a Las Vegas-based financial consulting firm, noted the quarter started slowly because of heavy rains in California.

Nevertheless, he said a number of factors "continued to pique interest from consumers all across the country in the uniqueness of Las Vegas as a destination."

In particular, Gordon said, increased international travel, the visitor-industry's recovery, destination marketing by the Las Vegas Convention and Visitors Authority, strong marketing by individual companies and record exposure for the destination in national television programming helped raise interest in Las Vegas.

The first quarter's two laggards were Caesars Entertainment, which is being bought out by Harrah's Entertainment, and Mandalay Resort Group, which is being sold to MGM Mirage.

Caesars' net income for the quarter should be $69 million, down 2 percent from $71 million a year earlier, and Mandalay's net income should be $91 million, up 14 percent from $87 million in the same quarter a year earlier.

Hausler said Caesars Entertainment has divested itself of a number of properties in anticipation of the merger, which cut its revenue and earnings streams.

"The underlying property-by-property performance should be pretty solid," he said.

Mandalay Resort Group may also have been affected by activities related to the merger, Hausler said.

Also, Wall Street projections for Caesars and Mandalay may be flawed because analysts have already started consolidating the balance sheets in anticipation of the mergers, he said. "Property-by-property, (Mandalay) is doing OK, especially coming off a record quarter a year ago," he said.

Station Casinos should lead the field in growth with net income in the 2005 first quarter of $46.3 million, up $76.1 million from a loss of $29.8 million a year earlier.

Boyd will follow with net income up 153 percent in the first quarter of 2005 to $48.5 million compared with $19.2 million in the 2004 first quarter, thanks in large measure to its acquisition of Coast Casinos.

Overall, Gordon said, a lull ordinarily would have been expected in the market just before the debut of the first major resort to open in five years, Wynn Las Vegas, which opens later this month.

That there was no lull suggests the year will continue strong and growth will probably accelerate, he said.

Falcone predicted growth in the second quarter will be strong. He added that the opening of Wynn Las Vegas should affect the sector positively in the second quarter and help drive room rates upward.

However, he warned to expect competitive dynamics among the industry leaders to shift in the year's second half.

"We expect to see increased competition, particularly on the high end of the business, but maybe not until the fourth quarter. You could see competition for high-end gambling more than cuts in room prices," Falcone said.

"Room prices should continue to trend upward, even given the traditional cyclicality over the summer months," he said.

Las Vegas Sands Corp., which went public late last year, and Wynn Resorts Ltd., which becomes operational later this month, will be added to the top operators this summer and financial results for Caesars Entertainment and Mandalay Resort Group will be consolidated into Harrah's Entertainment and MGM Mirage respectively after they complete their mergers.

Gaming Companies Expected to Report Record Profits is republished from