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Rod Smith

Gaming Stocks Slip for Second Month

1 September 2004

Gaming stocks took another dive in July, suffering through their second month in a row of summer doldrums, analysts said Tuesday.

The Applied Analysis Gaming Index, a weighted average of local gaming stocks, ended August at 229.83, down 6 percent, or 15.5 points, from July, but up 28 percent from August 2003. It was only the third time in a year that gaming stocks dipped. That followed a drop of 5 percent, or 12.5 points, in July.

Three main factors took the wind out of the industry's sails: investor fatigue with the sector, doubts about the expansion of gaming to new jurisdictions and prospects that shares in Harrah's Entertainment will stay in merger purgatory while its $9.4 billion deal to buy Caesars Entertainment is pending, analysts said.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said a host of other issues also worked as factors on gaming stocks, including mixed economic data, a slowdown in consumer spending nationally and rapidly escalating energy costs.

He also said a two-year run in which gaming stocks outperformed broad market trends had also led to some investor profit-taking over the summer months.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said the summertime slowdown amounted to an orderly rotation of investor priorities away from gaming stocks after they outperformed the Standard & Poor's 500 Index for 18 months.

Brian Gordon, spokesman Applied Analysis, a Las Vegas-based financial consulting firm, said the profit-taking was triggered at the beginning of the summer by strong earnings reports for the second quarter coupled with tepid financial guidance from gaming companies for the remainder of 2004.

He said slot makers drove the bulk of the decline in the Applied Analysis Index, primarily because of the drop in valuation for Reno-based International Game Technology.

Investor hesitation about slot makers generally stemmed from slower-than-hoped-for sales in recent months, a decelerating replacement cycle and concerns gaming will not spread to new jurisdictions as quickly as previously projected.

"Despite (tribal) gaming expansions in California, Pennsylvania and across the pond, slower sales activity and soft expectations drove valuations south for the summer," Gordon said.

Among gaming operators, Harrah's Entertainment put in the weakest performance, with Mandalay Resort Group and Caesars Entertainment proving the strongest.

Hausler said Harrah's recovered some in August, although it remained nearly 15 percent below its premerger announcement prices.

Greff said both Harrah's and MGM Mirage, which is buying Mandalay Resort Group for $7.9 billion, will remain in "deal purgatory" while their proposed mergers wait for federal and state regulatory approvals.

"It'll take six to 12 months for the deals to close and investors won't make a big play with them on the table," he said.

Caesars and Mandalay, by comparison, are trading at relatively fixed prices set by the merger agreements, and their shares cannot be expected to rise or fall markedly while the deals are in the works.

Gordon said Station Casinos, whose weighted average value increased more than 50 percent in the past year, is the exception to the rule among gaming stocks.

"Station is just percolating along. It's an odd man out. Clearly, they have a long-range growth plan in place, including a strategy of locking up casino sites throughout the Las Vegas Valley plus potential management agreements outside the state for tribal casinos," he said.

Gordon was cautious looking into his crystal ball for the remainder of 2004, saying that continued uncertainty and skepticism are driving the Applied Analysis Index as investors wait to see if the local economy stabilizes or returns to its previous path of record growth.

"June indicators in Southern Nevada provided the first glimpse of a potential slowdown from the feverish pace reported during the first half of the year," he said.

Gordon added that pent-up demand from visitors who are waiting to visit until Wynn Las Vegas opens April 28 could also tamp down growth rates, and should create a surge in the first half of 2005.

"The Steve Wynn project is expected to generate its own demand, and boost visitation and spending figures for all players along Las Vegas Boulevard," he said.

"The short-run impact shouldn't hurt the financial performance of gaming companies, but it will put their performances under the microscope in the interim."