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Rod Smith

Gaming Stocks Lukewarm in August

2 September 2003

Despite surging leisure travel and steadily increasing room rates, gaming stocks put in a tepid August with Boyd Gaming Corp. shares trading down 14 percent.

Overall, gaming stocks lagged broader market trends. The Dow Jones casino index closed at 292.90 Friday, flat for the month, while the Standard & Poor's 500 Index closed at 1,008.01, up almost 1 percent.

Even though gaming stocks underperformed broader markets, Mandalay Resort Group shares closed up more than 8 percent at $38, and MGM Mirage ($36.26) and Station Casinos ($29.75) shares each closed up 4 percent, thanks to rebounding industry fundamentals.

The Applied Analysis Gaming Index of local gaming stocks, a monthly weighted average of eight local stocks, rose to 180.14 in August, up 1.9 percent from 176.73 in July and up 4.7 percent from 172.13 a year earlier.

The gaming operators included in the index all contributed to the upswing except for Park Place Entertainment Corp., which closed at $8.78, down 4 percent, while the manufacturing component declined 3.5 points.

"Decent second-quarter earnings reports late in July continued to hold up the (stock) performance of operators, but International Game Technology reported its first decline in valuation in months," said Applied Analysis spokesman Brian Gordon. He attributed the IGT decline to a market correction.

Industry fundamentals also held stock values up, with reports that Nevada casinos raked in 13.3 percent more in June than the same month of the prior year and Strip properties won 19.2 percent more, he said.

Analysts attributed the improved fundamentals to increased leisure travel over the summer, stronger room demand and higher room rates.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said "operators attribute pricing power to better leisure volumes than last year."

Also in August, Atlantic City reported a 4.4 percent increase in July revenues compared with the year before, although the revenues included the first month of the Borgata (an MGM Mirage and Boyd Gaming joint venture). Without the Borgata, Atlantic City casino revenues were down 6.8 percent.

Boyd closed at $15.35, down from $17.85 a month earlier.

"On the surface, it doesn't appear that the new property has driven as much increased demand in its first month as was expected. It will be interesting to see if the Atlantic City market will draw new visitors with this younger, hipper facility," Gordon said.

"Some (stocks such as Boyd) underperformed the broader markets because of disappointing earnings, but industry fundamentals still looked strong and look good for the fall," said Deutsche Bank analyst Marc Falcone.

In August, slot manufacturer WMS Industries posted the largest increase in daily average stock price from the prior month, closing at $23.95, up 36 percent.

"During August, WMS released earnings for their 4th fiscal quarter, which provided positive results at the top line. Revenue growth was driven by increased sales of equipment, despite declines in gaming revenue. WMS received several Wall Street upgrades, notwithstanding a sharp decline in profitability, mainly because of several one-time charges," Gordon said.

WMS is expected to unveil its new slot machine operating system and expanded product line at the G2E trade show on Sept. 16 in Las Vegas.

"Investors are betting on the success of their self proclaimed 're-emergence plan,' " Gordon said.

Looking ahead, "we are anticipating a relatively stable performance for the balance of 2003 from the major operators assuming no significant world events," Gordon said.

At Blaylock and Partners, analyst Ray Neidl said the gaming sector is being driven by increasing convention business and economic recovery, both of which should keep Las Vegas doing well into the fall.

Fulcrum's Greff, however, urged caution.

"Remember that September is a big month, accounting for 40 to 45 percent of total third quarter revenues, so it's too early to get very excited about quarterly numbers," Greff said.