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Rod Smith

Southern Nevada Economy: Casino Stock Gauge Declines in May

1 June 2004

Gaming stocks, after enduring a month-long selling binge in which average prices skidded more than 15 percent, rallied in the last two weeks of May.

Gaming analysts called the sell-off and price drop a midcourse correction, although they remained cautious about gaming stocks' fortunes in the second half of 2004.

Eric Hausler, an analyst with Susquehanna Financial Group in New York, said the sell-off, which took place from mid-April to mid-May, was largely "a macrophenomenon" in reaction to the generally weak performance of major stock markets.

Gaming stocks tend to outperform broad market trends when prices are rising and often underperform the market when prices are sinking in a short-term market adjustment.

The Applied Analysis Gaming Index, a weighted average of local gaming stocks, dropped in May for the first time since February 2003, when the war with Iraq was starting, because of profit-taking, a weak economy and generally falling stock markets.

The index closed at 245.01 in May, down 23.7 points, or 8.8 percent, compared with April. The index still stood 57 percent above the 155.79 it hit a year earlier.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, warned, however, that one month does not make a trend.

He said profit-taking, which was also a factor at the end of April, played the biggest role in May.

"Profit-taking played a significant role in the overall gaming valuations in recent weeks. With a majority of the companies reporting strong first-quarter results in April, stock prices immediately jumped on the news. Then they pulled back as investors decided to realize their gains," Gordon said.

He said gaming stocks continued to sink in early May because investors were concerned about whether the industry's performance could be sustained and several Wall Street analysts downgraded the stocks, citing an absence of upward guidance from the companies for the balance of 2004.

However, Gordon said much of the group had recovered to preadjustment levels by the end of the month, following a two-week rally for the industry.

Analysts pointed out the market correction lasted from mid-April to mid-May, with stock prices outperforming the broader market early in April and again late in May.

The Dow Jones Casino Index closed Friday at 414.97, down 5 percent from the end of April. However, the index had climbed 4 percent in the first three weeks of April, dropped 14 percent until mid-May, and climbed 4 percent at the end of May, for a net loss over the two months of 7 percent.

The Standard and Poor's 500 Index closed Friday at 1,120.68, down 1.5 percent in May. By comparison with gaming stocks, the S&P climbed 2 percent in the first half of April, dropped 4 percent in the next four weeks, and regained 3 percent for a net gain of 1 percent over the two-month period.

Hausler said the market correction was the result of gaming stocks overreacting to broad market conditions.

"They'd sold too strong and they corrected (downward)," he said. "Now, they're surging back. They actually did very well in the back half of May compared with how the market did. They went from overbought to oversold. Now you're getting back to fundamentals."

Hausler said industry fundamentals, including visitor volumes, room rates and casino hold, remain strong and should improve in the year's second half.

"Across the industry, the second half looks strong, especially for the Las Vegas operators. There's no doubt Las Vegas is doing very, very well," he said.

Merrill Lynch analyst David Anders pointed out in an investor advisory that his firm's proprietary Las Vegas room-rate survey showed mid-week room rates have been up 39 percent on the average throughout the second quarter compared with a year ago and weekend rates have been up 22 percent.

He said demand for Las Vegas properties, especially MGM Mirage properties, has remained strong, driven largely by record convention traffic.

Furthermore, analysts and companies generally are optimistic that added jurisdictions will approve added gaming opportunities, especially California and Pennsylvania, which will provide another market boost.

At least one analyst, however, was more cautious about the year's second half.

UBS Warburg analyst Robin Farley warned that after a strong recovery in early 2004, Las Vegas could face tougher comparisons with last year, starting in the year's second half, given signs that the number of first-time visitors has been flat and that there are few new resort or hotel tower openings on the horizon.

"After slower (comparisons) for the next year, trends could turn up in mid-2005 for 12 months following (the opening of) Wynn Las Vegas and The Venetian's Palazzo, and Mandalay or MGM projects (that) may be in store," she said.