Casino industry gains Wall Street spotlight

August 06, 2002 - With a flurry of impressive earnings results from several Las Vegas gaming giants, the industry is getting the thumbs up from many Wall Street analysts.

The rave reviews come despite a tough road over the last two months, according to research compiled by Applied Analysis, a local economic research firm.

"I think with the market hitting massive lows, to see stock prices of gaming

companies not fall that far down is a good sign," said Brian Gordon, a principal with Applied Analysis.

The research firm has compiled a gaming index focused strictly on companies with strong local ties, including MGM Mirage, Park Place Entertainment, Mandalay Resort Group, Harrah's Entertainment, Station Casinos, International Gaming Technology, WMS Industries and Alliance Gaming.

The index, which is published monthly, began a steady climb in April 2000 and continued to grow to more than 50 percent from its 100-point starting point in 1998.

The group established a 100-point basis by weighting the companies on a scale, according to market capitalization. Through August 2001, while the technology sector slid and investors looked for safer havens, the index climbed to more than 150.

After taking a 20 percent hit in the month of September as the nation dealt with terrorist fears, the index rebounded to its previous 150-point level by November and enjoyed solid growth through May, where it hit its peak of 212.

Then came the bears of June and July, and the index still sits at 186.

As casino revenues rise, projects like the Colosseum at Caesars Palace draw renewed attention.

So why all the cheer from analysts about local gaming stocks?

Researchers and analysts claim profound reasons. Impressive earnings results are a good starting point. (See sidebar.)

To name a few, Harrah's recently reported a 17.9 percent increase in earnings per share, MGM Mirage beat last year's number by 34 percent, and Mandalay Bay, which reported in May, came in 16.3 percent higher.

Larry Klatzkin, a gaming analyst with Jefferies & Co., said he is optimistic about the long-term strength of larger gaming stocks, like the ones in the Applied Analysis index, and positive earnings results are only part of it.

Klatzkin said growth booms along the Strip have traditionally been strong for revenue growth, which provides a subsequent push for the stock.

"Historically, that's been the case. It's always been followed by (revenue) growth," he said.

Keven Picardo, president of locally-based Wall Street Financial Services Inc., a local stock brokerage and gaming research firm, emphasized market watchers tend to have a lot of confidence in the decision making abilities of casino executives when it comes to expansion because of the winning track record.

"When a casino says it's building a new tower or convention center you have to think the individuals making those decisions have their finger on the pulse of what's needed. It casts a positive light on the stock," Picardo said.

Gordon pointed out that future room bookings are things companies will be watching for when additional rooms come on line.

"I think we'll be looking at pre-booked hotel rooms and compare them to the same month last year, as well as comparing room rates between the same months," he said.

Valley gaming stocks are in a good place, said Bear Stearns & Co. gaming analyst Christa Short, highlighting IGT as a favorite stock.

Short also touched on the dynamics valley stocks faced since Sept. 11.

She emphasized that, shortly after the attacks, investors were thinking the valley's dependence on tourism would drag the stocks down.

In response, investors flocked to small-cap gaming companies that owned a diverse portfolio of casinos that served primarily drive-in clientele.

Since June and July, however, Indiana and Illinois implemented higher tax rates for casinos in order to shore up budget shortfalls. The Las Vegas tourism market also proved its resilience. As a result, investors returned to local gaming stocks because of the favorable regulatory environment.

The result was not only a surge in individual investors, but also a rise in institutional investors gobbling up chunks of stock.

"After Sept. 11, investors were worried that people would never travel again, and a lot of these companies traded down," Short said. "But I think the tax issues in other states caught investors off guard."

Simply put, investors have realized that a sudden 25-50 percent spike in gaming taxes is unlikely to happen in a state that knows its bread and butter comes from casinos.

Bill Thompson, a UNLV professor of public administration, agreed. Although he does not own any gaming stocks now, he said he wished he did.

"I think the majority of the public would say gaming is a good place to be," he said. "People tend to turn to gaming in hard times."

Picardo added, "It's quite a resilient industry. There's usually not as much of a downturn in the recessions."

But perhaps what makes the valley's gaming stocks even more resilient, said Short, is a straight forward approach to reporting earnings.

"Right now the big thing with accounting is revenue recognition," said Short. "With gaming, it's a cash business, either you make the money or you don't."

Short also pointed to the close monitoring by the state's gaming board as another safety net. Since the state is banking on revenues from the gaming companies, there is incentive to make sure the numbers are right for both parties, she said.

"The risk is far greater than the reward for a company to try something," she said.

<< Go Back

Article Copyright ©: B. Sodoma, LV Business Press