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Rod Smith

Gaming Stocks Recovering

1 October 2004

LAS VEGAS -- Gaming stocks had a banner month in September, recovering from their summer doldrums with a surge of 12 percent in the Dow Jones Casino Index and 6 percent in the Applied Analysis Gaming Index, a weighted average of local gaming stocks.

The Applied Analysis index increased 15.5 points in September to close at 246.72, after dropping 28.42 points, or 11 percent, in July and August combined.

Susquehanna Financial Group gaming analyst Eric Hausler said gaming stocks were oversold in July and August as room rates flagged, and September's performance was in part a market adjustment for the earlier overreaction to industry trends.

Deutsche Bank analyst Marc Falcone said the turnaround in September reflected a reacceleration of growth in the Las Vegas market following the summer slowdown and better investor appreciation for the creative nature of the two pending megamergers between Harrah's Entertainment and Caesars Entertainment and MGM Mirage and Mandalay Resort Group.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said investors were also beginning to bet on the surging value of Las Vegas real estate, including the property MGM Mirage will control once its merger is consummated.

An investor advisory released this week by Merrill Lynch estimated that MGM Mirage, combined with Mandalay, will control about 150 acres of excess land on the Strip worth up to $300 million.

Shares in MGM Mirage led other operators, closing at $49.65, up more than 15 percent for the month.

Brian Gordon, spokesman for Las Vegas-based Applied Analysis, a financial consulting firm, said MGM Mirage's performance was driven by a Merrill Lynch upgrade from "neutral" to "buy" and successful placement of $450 million in debt.

In addition, Greff said investor understanding of the tremendous potential for gaming operations in Macau was driving shares in Wynn Resorts Ltd. upward. Wynn Resorts closed Thursday at $51.69, up 34 percent for the month.

Gaming operators in the index accounted for the bulk of the September gain, with an increase 12.4 points, while the gaming manufacturers lagged with a gain of only 4.5 points.

On the equipment side, analysts agreed investors were moving quickly into the companies' shares, anticipating introduction of new slot machines at next week's Global Gaming Expo at the Las Vegas Convention Center.

"Investors wanted to buy in advance of the buzz and excitement of G2E," Greff said.

Gordon said mergers, acquisitions and divestitures continued to be the hot topic dominating investor interest.

He also said investors were looking more favorably on Harrah's Entertainment's $9.4 billion buyout of Caesars Entertainment as they realize it will likely entail fewer antitrust concerns than originally expected.

In addition, while helping to address antitrust concerns, deals struck by Harrah's and Caesars to sell four noncore assets for $1.2 billion reassured investors fire sales would not be necessary, even if regulators force casino sales, Gordon said.

During the month, Colony Capital agreed to pay 8.5 times cash flow for Harrah's East Chicago, Harrah's Tunica (Miss.), Atlantic City Hilton and Bally's Tunica (Miss.). By comparison, Harrah's is buying Caesars for 7.5 times cash flow, meaning the sales represent an immediate profit and Harrah's will assume less debt.

International Game Technology shares led the manufacturing side, closing at $35.95, up almost 23 percent for the month.

Falcone said prospects for the growth of gaming overseas, especially in Macau, combined with continuing prospects for converting casinos to cashless slot systems have been driving share prices in IGT.

Gordon said the anticipation of G2E combined with a positive analysis in the Wall Street Transcript's annual report on gaming and gaming equipment also drove IGT shares upward.

He said the outlook for gaming stocks continues to improve, based on reasonable growth rates in the sector, improving national economic conditions and pent-up demand for leisure travel to Las Vegas which will be unleashed as the opening of Wynn Las Vegas, set for April 28, approaches.