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Rod Smith

Market in Review: Gaming Stocks Slide in October

1 November 2005

Wall Street jitters over soft room rates and faltering demand for Las Vegas vacations sent gaming stocks sliding in October for the third straight month.

The Dow Jones U.S. Gambling Index dropped 6 percent for the month, closing Monday at 436.46, almost 20 percent from the high it reached at the beginning of August.

In a break from a five-year tradition, the industry underperformed the broader market indexes, with the Standard & Poor's 500 Index closing Monday at 1,207.01, down 1.8 percent for the month and 3 percent since August.

Susquehanna Financial Group gaming analyst Brian McGill attributed the lackluster performance to uncertainty over consumer spending, rising interest rates, havoc from the Gulf Coast hurricanes and weak room rates coming after a two-year run-up in stock prices.

"Gaming stocks are having a pull-back after a huge run for two years," he said. "When multiples expand, the numbers have to come in above expectations, but instead investors saw room rates coming in soft."

The Applied Analysis Gaming Index, a weighted average of nine local gaming stocks compiled by the Las Vegas-based financial consulting firm Applied Analysis, underscored the pounding gaming stocks took in October, dropping to 269.4, down 20.1 points, or 7 percent, on top of two previous months of declines.

Brian Gordon, an Applied Analysis partner who follows the gaming industry, said the gaming stock values for companies included in the index posted their single-largest monthly decline since the index began in January 1998.

The Applied Analysis index consists of MGM Mirage, Harrah's Entertainment, Las Vegas Sands Corp., Wynn Resorts Ltd., Boyd Gaming Corp., Station Casinos, International Game Technology, WMS Industries and Alliance Gaming.

"Much of the fallout in recent months is due to several factors, including the impacts of hurricanes Katrina and Rita, elevated energy costs, slides in national consumer confidence and uncertainty surrounding the viability of Midwest gaming markets," Gordon said.

Since July 2005, the first full month before Hurricane Katrina, market capitalization of the companies in the index has dropped 14.9 percent, or approximately $10 billion, he said.

Market capitalization is the total dollar value of all outstanding shares.

The Applied Analysis index is a weighted average that does not fully account for the plunge in MGM Mirage shares last week following the company's earnings report. Therefore, even larger declines in the index are anticipated this month.

Altogether, the 52 companies included in the Dow Jones gaming index dropped nearly $3 billion in value in October alone, closing the month with a market capitalization of $47.9 billion.

Among local gaming stocks, only Las Vegas Sands, owner of The Venetian, and Wynn Resorts, operator of Wynn Las Vegas, withstood the slump in October, with shares closing at $34.30, up 4.2 percent, and $46.63, up 3.3 percent respectively.

McGill said Las Vegas Sands, swooned early in the month, but then traded up into expectations of a strong earnings report Wednesday and further developments in Macau where the company is developing the Cotai Strip.

Considering Wynn Resorts, Bear Stearns analyst Joe Greff cited concerns about the increasing competition on the Strip for the market's high-end gaming resort segment, on which Wynn Las Vegas is squarely focused. Last week, Greff downgraded Wynn Resorts to "peer perform" from "outperform," based on its recent stock-price appreciation.

"While we are positive on Wynn Resorts in the long-term, we think it's tough to expect near-term appreciation given our concerns about the Las Vegas Strip and a lack of near-term positive catalysts over the next six months," he said.

Gordon said both Las Vegas Sands and Wynn withstood the dramatic slide in stock values because of their focus on the Strip and developments in Macau.

MGM Mirage was the big loser, closing at $37.37, down 14.6 percent for the month.

Falcone said MGM Mirage shares slumped as earnings performance fell short of "lofty expectations."

In general, he said the whole sector also fell victim to soft investor sentiment for the gaming industry.

McGill said in an investor advisory that Wall Street is particularly troubled by softening room rates and whether the trend suggest faltering demand for Las Vegas as a destination.

"Throughout the latter part of the summer and into the fall, investors have dissected the weekly room rates for Las Vegas in just about every imaginable way," he said. "Investors want to know if Las Vegas is still as hot as earlier in the year, how come they can call back a property three weeks later and get a rate in some instances that is $100 a night lower.

"This has caused some angst that maybe Vegas visitation is slowing and the room pricing is therefore not as attractive," McGill said.

Gordon said room-rate uncertainty wears on investors. But revenues per available room year to date are up compared with a year earlier, especially at MGM Mirage.

"It appears the high-end segment of the business has held and expanded given the opening of Wynn (Las Vegas) and the August Tower at Caesars Palace," he said.

For slot manufacturers, McGill said investors are just looking for good news.

"Since the last time we heard from them, we have gotten little positive news, and if anything, more negative news," McGill said.

"The positive, in a strange way, for equipment companies is the rebuilding of the Gulf Coast casinos, although a timeline there has yet to be discussed," he said.