Faith wanes, gambling stocks fade

Investor concerns about casino companies' second-half performance spark sell-off

July 31, 2004 - Gaming stocks in July suffered through only their second sell-off in almost two years because of investor doubts about the long-term sustainability of the industry's current expansion, analysts said Friday.

The Applied Analysis Gaming Index, a weighted average of local gaming stocks, closed July at 245.75, down 5 percent or 12.5 points from June, but still up 39 percent from July 2003.

Brian Gordon, spokesman Applied Analysis, a Las Vegas-based financial consulting firm, said the in drop-off was evenly split between operators and manufacturers.

The Dow Jones casino index, a broader gauge of gaming stocks nationwide, was hit even harder by flagging investor confidence, and closed Friday at 376.59, down more than 11 percent for July. By comparison, the Standard & Poor's 500 Index closed at 1,100.04, down 3 percent for the month.

Susquehanna Financial Group gaming analyst Eric Hausler said gaming stocks have had a remarkable run for the year-to-date and investors had to be expected to take some money off the table sometime.

He said gaming stocks were dinged partly by the broader market performance which put a great deal of pressure on stocks that have been performing well since the beginning of the year.

Gordon said interest in gaming stocks dropped off in July following the excitement generated in June by the announced $7.9 billion merger proposal between MGM Mirage and Mandalay Resort Group.

In addition, Harrah's Entertainment's stock was slammed in July following the announcement of its proposed $9.4 billion merger with Caesars Entertainment.

Harrah's closed Friday at $46.49, down 15 percent for the month. Wall Street analysts have said the shares are likely to remain in "deal jail" at least until the company issues an explanation of the merger that satisfies investors' concerns.

Profit-taking and concerns about how well gaming companies will perform in the year's second half accelerated the gaming industry sell-off, Gordon said.

Deutsche Bank analyst Marc Falcone also cited a lack of investor confidence in the strength of the Las Vegas economy and exaggerated earnings expectations, which he said left gaming stocks seriously out of favor with investors.

However, Las Vegas has consistently been the backbone of the industry's recovery from the slump following the Sept. 11, 2001, terrorist attacks, analysts said. This explains why shares in Las Vegas-centric operators where not hit as hard as stock in companies based elsewhere, they added.

Gordon said visitors are still flocking to Las Vegas and its economic recovery continues to outpace the national recovery.

Falcone said Wall Street's concerns about gaming stocks mainly focus on future growth and regional markets.

"The growth outlook is weighing on investors. They're concerned with the industry being more sensitive to issues (such tax increases or a manic search for mergers), difficult comparisons (with last year), elevated earnings expectations and decelerating growth rates," he said.

"In our view, we're looking at the current retreat in stock price performance as an opportunity for better entry points on high-quality gaming operators," Falcone said.

Gordon said a second rough month does not make a trend. The weak performance of gaming companies in July may just be another midcourse adjustment, he said.

Over the long term, increasing consumer confidence, the economic recovery and local expansion projects will keep the gaming industry in Las Vegas growing, he said.

"Historically, each crane located along the Las Vegas Strip has driven at least 1 percent in growth within the sector. Current expansions and the April 2005 opening of Wynn Las Vegas will continue to pique the interest of travelers and ultimately positively impact (stock) values," he said.

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Article ©: R. Smith, Gaming Wire