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Rod Smith
 

Poor Earnings Reports Contribute to Drop

1 September 2005

LAS VEGAS -- Gaming stocks were routed on Wall Street in August.

The Dow Jones U.S. Gambling Index tumbled almost 6 percent to close at 466.66, and every major Nevada-based casino company came out a loser.

In a rare reversal of fortune, the Standard & Poor's 500, which closed the month at 1,220.33, down 2 percent, outperformed the gaming index by almost 3-to-1.

Over the past year, gaming stocks have outperformed the S&P by 3-to-1, gaining 30 percent compared with the S&P's 10 percent.

Altogether, the 52 companies included in the Dow Jones gaming index dropped nearly $3 billion in value, closing the month with market capitalization of just over $47 billion.

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

The Applied Analysis Gaming Index, a weighted average of nine gaming stocks compiled by the Las Vegas-based financial consulting firm, dropped 10.6 points in August, down 3.4 percent, following two months of gains at the beginning of the summer.

Brian Gordon, a partner in Applied Analysis who follows the gaming industry, said continued positive earnings reports from the casino companies should have helped the values in the index hold up in August.

"Analyst concerns about the performance of the market may have triggered softer equity valuations despite strong gaming numbers in June industrywide," he said.

Goldman Sachs gaming analyst Steve Kent, whose in-house gaming index dropped 9 percent, said that despite strong earnings reports, expectations built over the past couple of years were hard to meet or to beat.

"And, looking forward, there are not that many catalysts in the next couple of months that could send (industry fundamentals) upward," he said.

Deutsche Bank analyst Marc Falcone said that in addition to unrealistic expectations, unnecessary concerns with oversupply in Las Vegas clouded investor judgments.

"There's a lot of inaccurate information in the market that has caused problems for the stocks," he said. "The number and timing of new units coming on the market, in particular, are vastly exaggerated."

Concerns over the effect of Hurricane Katrina on gaming companies with operations in the Gulf Coast compounded difficulties for casino stocks as the month closed. Harrah's was hardest hit, with a chance its Grand Casino buildings may be beyond repair, Gordon said.

"The unanswered question remains as to how the damage will impact the balance sheet of the world's largest gaming company and whether it moved forward with its potentially permanently damaged facilities," he said.

Mostly, the investor change in heart came from two disappointing earnings reports early in the month -- Harrah's Entertainment and Las Vegas Sands Corp. -- and profit-taking, Gordon said.

"Harrah's and Las Vegas Sands did not surpass market expectations by wide margins, which had become the norm during the past several quarters," he said. "At the end of the second quarter, Harrah's was integrating the newly acquired Caesars Entertainment, which should produce in excess of $80 million in merger-related benefits, but the second quarter was slightly off analyst expectations.

"Las Vegas Sands was boosted by the performance out of Macau, but there was softness related to the Las Vegas Strip in terms of gaming volumes."

Also, the second-quarter performance of Wynn Resorts Ltd. suggested Wynn Las Vegas' gaming revenue dropped by nearly 50 percent from the first 34 days of operation to the second month.

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

Reno-based International Game Technology had the strongest showing, closing at $27.72, flat for the month.

WMS Industries and Alliance Gaming, had the weakest performances, closing at $28.96 and $12, down 12 percent and 22 percent respectively.