Gaming: Staying ahead of the gaming

Stocks slip for second month in a row

September 09, 2004 - Despite everything else in the valley heating up in August, gaming stocks remained cool as the Applied Analysis Gaming Index (AAGI) lost 15.5 points, or 6.3 percent of its value, to close out the month at 229.83 points.

The August performance of eight leading gaming stocks - five casino operators and three game manufacturers - follows a similar slide in July and marks the third time in four months that the index tumbled after showing 13 continuous months of growth.

With the AAGI up 28 percent from August 2003, investors were still realizing profits on their investments, but softer guidance for the rest of the year after strong second-quarter earnings meant that some investors have been abandoning gaming in search of higher performing stock.

Moreover, market confidence is being dragged down for the short term by uncertainty in the bigger economic picture, as investors wait for signs of improvement amidst reports of a weak job market, declining consumer confidence and higher fuel prices that appear to be a permanent feature.

"The national condition is affecting conditions here," says Brian Gordon, principal at local marketing research firm Applied Analysis. "Concerns over employment growth are affecting casino companies. Income levels aren't rising with the level of spending we've seen. There is a short term change in valuation as the investing public pulls back to see where the national economy is heading."

With four of the five operators involved in mergers and acquisitions, the buyers have been slowly losing points as investors pull back until they see stronger signs of regulatory approval of the deals.

The average daily share price for Harrah's Entertainment stock in August fell 7.2 percent, or $3.53, to end at $45.74 and contributing 3.1 points in the AAGI's total decline while MGM Mirage shares dropped 5.2 percent, or $2.30, in the month to reach $41.60, hitting the index for 1.5 points. In the meantime, respective sellers Caesars Entertainment and Mandalay Resort Group hovered slightly below the offered price, with less than one percent movement in either direction.

On the game maker side of the market, slow sales combined with uncertainty over the scope and speed in the opening of new jurisdictions sent manufacturers downward, with International Game Technology leading the pack. Holding a 70 percent market share, IGT's average share price in August tanked 13.4 percent, or $4.65, to end at $30.11, contributing 13.2 points of the AAGI's total 15.5-point decline.

"There is speculation on gaming expansion, when and where they're going to occur," Gordon says. "For the company with the largest market share, IGT is going to get affected."

AAGI closes at 229.83 points: View PDF Format >>

With growth rates of various Las Vegas visitor indicators moderating after their rocket ride in the first half of the year, Gordon argues that some vacationers are putting off that Vegas trip until the expected grand opening of the Wynn Resort in April of next year.

"Leisure travelers may defer their travel plans, waiting for the opening of Wynn Resort in 2005, creating pent-up demand," he says. "I expect a fairly strong boost after the opening and for six months afterwards."

Such a spike in consumer interest could synchronize with clearer direction in the larger question of the national economy to concentrate investor focus on the Las Vegas product once again.

"We've seen periods of softness and less than expected growth," Gordon notes. "I don't expect that to sustain for six to twelve months."

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Article ©: S. Mihailovich, LV Business Press