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Rod Smith

Rising Gaming Stocks Torpedoed

3 May 2004

Profit-taking and investor doubts that Las Vegas can sustain its ongoing business boom shot a hole in ballooning gaming stocks, which dropped in price as a group in April for the first time since January 2002.

The Dow Jones gaming index of casino stocks fell to 423.24 in April, down nearly 6.5 percent from March and twice the drop in broad market indicators.

By comparison, the Standard and Poor's 500 Index ended the month at 1,107.30 Friday, down 3 percent compared with March.

However, the Applied Analysis Gaming Index, a weighted average of local gaming stocks, closed at 268.49, up nearly 6 percent in April compared with March and 81 percent higher than its value a year earlier.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said profit-taking in the last week of the month drove the declines, although Las Vegas-centric companies generally outperformed other gaming operators.

"On the (Applied Analysis Gaming) Index, it doesn't get reflected until there's a sustained drop in a particular month or over time (because it is a weighted average)," he said.

The profit-taking came in the wake of both record earnings reports from the major gaming operators and record stock prices.

Analysts said gaming industry fundamentals remain strong with no storm clouds on the horizon, although the Las Vegas economy is outperforming other markets and properties here are doing better than hotel-casinos and riverboat operations in the Midwest and on the East Coast.

Deutsche Bank analyst Marc Falcone said expectations for gaming stocks were very high at the beginning of the month, in part because of the strength of the Las Vegas economy.

"Now, investors look at the demand environment and ask how much better can Las Vegas get and how much longer can (the boom) last," he said.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said investors had expected strong first-quarter earnings reports, and casino operators delivered when they posted their results.

"But the momentum guys decided it was time to take some money off the table," taking their profits and creating the liquidity to invest in other sectors, he said.

Gordon added that there are no publicly available data that suggest the strong fundamentals in Las Vegas will not persist or that a downturn is taking place.

"If it wasn't apparent before, Vegas is on fire. All key indicators suggest that tourism is hopping. While comparisons with the same period of the prior year are somewhat misleading (because the economy had been depressed by hostilities in the Middle East), the results clearly suggest a change in domestic and international travel is occurring," Gordon said.

"It's really more that investors have decided to realize their profits," he said, with the Dow Jones gaming index up 75 percent from a year earlier, compared with the beginning of April when it was up 90 percent.

Among gaming operators, earnings were the proof of their operational performance, with records being set across the board in the first quarter, Gordon said.

"The Venetian results were just phenomenal, off the charts, with 40 percent (profit) margins. Mandalay (Resort Group) will also prove to have strong earnings at its properties, with a full quarter of The Hotel under its belt (when it reports in June)," he said.

Slot machine makers were the victims of added profit-taking, partly because of weaker earnings and because of steeper price run-ups over the previous year, Gordon said.

Reno-based International Game Technology, the manufacturing sector leader, closed Friday at $37.74, down 16 percent for the month, but still up 80 percent from a year earlier.