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Gaming Guru

Rod Smith

Gaming Stocks Carry Momentum of 2005 into New Year

1 February 2006

Wall Street gave gaming stocks rave reviews in January, with the Dow Jones U.S. gambling index climbing to 530.6, up 9 percent from the end of the year.

The Standard & Poor's 500 Index closed the month at 1208.08, up 3 percent from the end of the year.

Since the beginning of November, investors have pumped up the national gaming stock index by 23 percent, compared with a 7 percent increase for the S&P 500.

Brian Gordon, a partner in the Las Vegas-based financial consulting firm Applied Analysis, said gaming's newfound strength followed months of softness in the sector and jitters on Wall Street about the strength of demand for Las Vegas.

The Applied Analysis Gaming Index closed at 311.33 in January, up 5.3 percent from 295.67 in December.

"But in January, we saw reports that suggested the Asian gaming market may be more robust than we thought and the companies that benefited -- namely Wynn Resorts and Las Vegas Sands -- maintained a relatively high share of their assets in the Macau market, which pulled the sector up during the month," he said.

Wynn Resorts Ltd. started construction of its 16-acre project in June 2004. The resort, which will have a 600-room hotel and a 100,000-square-foot casino, is expected to be finished in September. Wynn Resorts closed Tuesday at $64.58, up 17.7 percent from $54.85 at the end of December.

Las Vegas Sands Corp. opened Sands Macau in May 2004 and is also building the Venetian Macau, a 3,000-room resort set to open in early 2007. Las Vegas Sands closed Tuesday at $51.35, up 30.1 percent from the end of December.

The other major development during the month was Boyd Gaming Corp.'s announcement of its $4 billion, Echelon Place project on the Stardust site, Gordon said.

Gordon said news of the mixed-use resort continued to demonstrate the evolution of the Las Vegas market and piqued the interest of investors, putting more upward pressure on stock pricing. However, Boyd closed at $45.20, down 5.4 percent from $47.66 at the end of December, amid investor jitters over the scope of the Echelon project.

Recent record gaming revenue, the continued strength of Las Vegas as a gaming destination and likely record earnings reports scheduled for the next few weeks also revived Wall Street interest in the gaming sector and "put upward pressure on pricing," he said.

Deutsche Bank analyst Marc Falcone said casino operators put in an award-winning earnings performance in 2005, although stock prices failed to match corporate financial gains.

The financial gains were based on the effects of the two largest casino mergers in history -- Harrah's Entertainment buying Caesars Entertainment and MGM Mirage buying Mandalay Resort Group.

Also boosting performance were the opening of Wynn Las Vegas, the acceleration of the Sands Macau project and a variety of strong earnings drivers such as the growth of convention business and expanded entertainment, dining and retail offerings, Falcone said. He warned that 2006 will be more challenging.

"While the fundamentals in Las Vegas still remain strong and above the prevailing negative (investor) sentiment, there are (legitimate) concerns about slowing room rate growth, escalating cost pressures and market valuations close to national peaks," Falcone said.