RECORD EARNINGS: Cash flowing for gaming industry

Income up 45 percent from third quarter of 2003

October 14, 2004 - Major Las Vegas gaming operators finished the third quarter with record earnings unseen since the terrorist attacks of Sept. 11, 2001, thanks to a surge in leisure and business travel fueled by the economic recovery, analysts said Wednesday.

Deutsche Bank analyst Marc Falcone said that Las Vegas in particular, because of the strong demand it enjoys as a unique travel destination, has experienced a remarkable rebound in gaming and nongaming operations that is lifting profits both for individual companies and the industry as a whole.

"Wall Street has been underestimating the margin potential of the gaming business, but clearly increased demand and higher prices are driving profits skyward," he said.

Susquehanna Financial Group gaming analyst Eric Hausler said the gaming industry is continuing the march it started in the second quarter, surpassing pre-Sept. 11 earnings levels into record territory.

"We clocked back in the second quarter and now we're headed deeper into record territory and a growth trajectory again," he said.

The only significant exception to the across-the-board growth was in the Gulf Coast area, where four hurricanes and a soft July had a negative effect on gaming in the region, Hausler said.

Overall, however, combined net income increased 45 percent from $267 million a year ago to an estimated $388 million in the third quarter this year for Boyd Gaming Corp., Harrah's Entertainment, Mandalay Resort Group, MGM Mirage, Station Casinos and Caesars Entertainment (previously Park Place Entertainment).

Combined cash flow for the Las Vegas "Big Six" increased to $1.4 billion in the third quarter, up 21 percent from $1.2 billion a year earlier, according to data from Fulcrum Global Partners, an independent Wall Street investment research firm.

Cash flow, generally defined as earnings before interest taxes, depreciation and amortization, is another key measure of profitability for the gaming industry.

Revenues for the six gaming industry giants combined increased 12 percent to $5.1 billion in the third quarter from $4.6 billion a year ago.

Analysts pointed out that a small part of the increase was attributable to Boyd Gaming Corp.'s $1.3 billion buyout of Coast Casinos in early July.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, also said Wall Street estimates were a little higher than expected and that the state's soft gaming win for July and August combined was of some concern.

"Still, the creativity of operators on the Strip continues to generate revenue and growth opportunities. They show Las Vegas is evolving into more of an entertainment (than a gambling) destination, clearly making up for soft casino revenues," he said.

"Revenues are much more diverse than they used to be, which bodes well for operators and helps stabilize the (gaming) sector," Gordon staid. Deutsche Bank's Falcone said Las Vegas has become such a unique destination, especially with its exposure in a number of television series, that it will certainly keep hitting records, including an estimated 37 million visitors this year.

He said continued strength in convention business and the scheduled opening of Wynn Las Vegas in April should keep driving Strip casino properties to new records in 2005.

At Susquehanna, Hausler said possible changes in consumer attitudes and spending trends are the only serious economic concerns on Wall Street, but that they should not be discounted.

"Consumer spending so far is holding (steady, but off its early growth path). And gaming tends to be very resilient. But it goes in first and starts. It's important to watch carefully, but it's not alarming, not at this point."

Analysts also cited possible terrorist attacks as high risk factors for the gaming industry as well as the economy in general.

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Article ©: R. Smith, Gaming Wire, LVRJ