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Rod Smith

Stock Index Makes Jumps

1 December 2003

Gaming stocks broke loose in November, outpacing the Standard & Poor's 500 Index 3-to-1 and setting a string of records for the month and the year-to-date.

Driven by solid earnings and prospects for gaming proliferation, casino stocks continued to climb in November with the Applied Analysis Gaming Index of local gaming stocks up 10.4 points, or 5.4 percent, for the month, double its rate of increase in October.

Applied Analysis' monthly weighted average of eight local stocks rose to 204.75 in November, up from 194.35 in October and 159.28 in November a year earlier.

Similarly, the Dow Jones casino index closed Friday at 355.85, up 8.25 for the month and nearly 50 percent year-to-date. That solidly beat the increase in the index every year since 1998, the first year for which comparable data were available.

Investors are betting the economic recovery will continue, which is boosting operator stocks, and that gaming proliferation will continue and pick up steam, accelerating the appreciation of manufacturers' stocks, Deutsche Bank analyst Marc Falcone said.

In general, third-quarter earnings were much more in line with expectations than the first half had been and the outlook for December and 2004 continue to be favorable, he said.

Reno-based International Game Technology continued to be a primary reason for the rapid appreciation in the index of local gaming stocks, Applied Analysis spokesman Brian Gordon said.

IGT closed the month at $34.69, or a monthly average price of $33.23, representing an increase of nearly 10 percent, he said.

"Expectations for gaming expansions in new jurisdictions and the current trend of converting casino floors to coinless machines continues to drive demand for the company's equipment and their stock price," Gordon said.

Among major operators, Station Casinos experienced a slip in value of more than 7 percent during the month, closing at $31.18, despite holding on to a 65 percent increase, year-over-year, he said.

At Deutsche Bank, Falcone said concerns about the company's reported development costs tripped its stock performance early in the month although it bounced back in the last two weeks.

However, Joe Greff, gaming analyst with Fulcrum Global Partners, an independent Wall Street investment research firm, said the slippage in Station stock reflected concerns about political events and gaming expansion in California, where the company operates Thunder Valley Casino, and what that could mean about tribal management opportunities.

Other major operators fared better, including Harrah's Entertainment (closing at $47.87, up 10.25 percent for November), Park Place Entertainment ($10.46, up 9.5 percent) and Mandalay Resort Group ($49.25, up 9.25 percent).

Greff said investor support for both Harrah's stemmed largely from better-than-expected performance from Atlantic City operations, followed by Las Vegas.

"For Mandalay, the driver was strength in room rates and the outlook for convention business beyond their fourth quarter (which ended Oct. 31)," he said.

And for Park Place, "the driver has (also) been better-than-expected results out of Atlantic City," Greff said. November was the first month Park Place shares closed above $10 since July 2002.

While agreeing that the company's November performance in Atlantic City helped drive share prices upward, Falcone said pure market expectations may have played a bigger role.

"The market overall has low expectations for Park Place. Value seekers are looking at companies like Park Place and are starting to invest," Falcone said.

However important performance was for other operators, Wynn Resorts led the pack in terms of stock price appreciation despite having no operating income or profits, closing the month at $24.89, up 18 percent in November.

The price climb started with developer Steve Wynn's enthusiastic Wall Street presentations when he returned from Macau, where he plans a casino development, and continued as investors realized developments there are imminent, Falcone said.