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Rod Smith

High Times for Bottom Lines; Some Analysts Say Profits Could Spark Boom in Building

20 April 2004

To build or not to build, that is a key question facing the gaming industry, analysts said Monday.

Analysts are divided on whether casino companies that are enjoying skyrocketing earnings and stock prices should be pouring more money into new construction.

Some analysts said casino companies that are expected to start posting record profits this week could fuel another building boom. However, any boom likely would be tempered by the growth opportunities the companies have outside Las Vegas, they added.

Other analysts, however, maintained that such growth could lead to overbuilding and an eventual bust cycle.

Over the past six months, the gaming companies have outperformed other industries as earnings have been revised upward and their stocks have outperformed broad market gauges, analysts said.

Since the beginning of October, the Dow Jones casino index has increased 42 percent to 458, up from about 315 while the Standard & Poor's 500 Index has climbed 11.5 percent to 1,136, up from 1,018.

In an advisory to investors, Merrill Lynch found this "outperformance" has been driven by astounding increases in room rates and a steady flow of visitor traffic, both conventioneers and leisure travelers.

"With improved valuations (like these), management teams of Las Vegas companies typically convince themselves that they are growth companies and start planning new megaresorts on the Strip, which eventually leads to escalating investor fears of over-supply and ultimately contracting valuations," Merrill Lynch warned.

For now, however, there is only one megaproject scheduled to open in the spring of 2005, Wynn Las Vegas, and additional announcements have been slow in coming, Merrill Lynch analyst David Anders said.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, agreed with the rosy forecast for the industry. But he took issue with the boom-and-bust scenario.

"Our positive outlook is based on our recent checks on room rates, room availability and the large increase in new conventions and shows being added -- sometimes as little as weeks before -- to the calendar in Las Vegas," Greff said.

And next year, there are more large conventions and trade shows coming to Las Vegas for the first time, so the midweek strength and operating leverage associated with high conventioneer room rates and higher margins revenues should continue, he said.

Greff said there is a strong need for added megaresorts and airline service that lure the added visitors to keep the Las Vegas "perpetual motion" growth machine going.

Otherwise, visitor numbers will slacken and Las Vegas will drive itself into another bust phase of the local business cycle, although analysts said such a dire outcome, while possible, is unlikely.

One of the key differences with prior cycles, however, is that large opportunities exist internationally, which could provide companies the growth they want without cannibalizing existing businesses, they said.

Moreover, some companies, such as MGM Mirage, do not have the balance sheets to undertake major projects in Macau, Las Vegas and the United Kingdom simultaneously, Anders said.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said the opening of Wynn Las Vegas should herald another upward swing in the local business cycle.

"It should stimulate its own demand plus incremental business for the city as a whole," he said.

Gordon said the development of such "motion machines" is the prescription for Las Vegas to perpetuate its growth rates, and predicted there will be more developments like it with similar impacts in the future.

"When we look at long-term expectations and hotel supply, Las Vegas remains unique," he said. "Competition will drive development here and there isn't anyplace else on the horizon that can really compete."

Only California comes close, but Gordon said that even if Gov. Arnold Schwarzenegger proceeds with added tribal casinos and added slot machine spots, serious competition for the Strip is years away.