Investors in the gambling industry may have already scored the easy money.
Share prices have climbed 94 percent from their September lows, according to the Dow Jones casinos index, and the stocks of the largest casino operators are considerably more expensive than they were before Sept. 11, said Robin Farley, an industry analyst at UBS Warburg.
Late last summer, the four largest casino operators traded at an average of 6.6 times Farley's estimate for 2002 cash flow. Now they are trading at 7.8 times expected 2003 cash flow. "Not only are they trading at a higher multiple, but we are looking farther ahead," she said.
PHOTO: NY TIMES
Some investors say better bargains may be found in gambling companies that operate outside Las Vegas, particularly those that run riverboat casinos. Others are holding fast to the four big companies based in Las Vegas: Mandalay Bay Resort, MGM Mirage, Harrah's Entertainment and Park Place Entertainment.
"The market has almost systematically underestimated the growth potential of these companies," said Larry Haverty, a gambling industry analyst at State Street Advisers in Boston, which owns roughly 5 million shares of casino stocks through various mutual funds.
For instance, he estimates that cash flow at MGM Mirage will increase 10 percent annually over the next three years, and he said prudent management might lead to annual earnings growth as high as 15 percent.
But Anthony Socci, an analyst at Dreyfus, said he would prefer to pick up shares of the larger operators after prices declined somewhat -- which could happen if casino workers go out on strike. Members of the Culinary Union, representing 45,000 restaurant workers and housekeepers in Las Vegas, on Thursday authorized a strike if contract negotiations are not settled by the end of this month.
In the meantime, Socci favors Station Casinos, which runs less elaborate casinos catering to residents of the Las Vegas suburbs. The demographics are terrific, Socci said. "It's the fastest-growing city in the country," he said, "and the people moving there are gamblers."
Dreyfus owns 1.9 million shares of Station in several mutual funds. The stock closed at US$17.60 on Friday, up 58 percent this year.
Farley recommends Argosy of Alton, Illinois, which runs riverboat casinos from Cincinnati to St. Louis. With Argosy's acquisition of a casino in suburban Chicago, cash flow grew 48 percent in the first quarter. The company increased cash flow 7 percent at the casinos it owned a year ago. Argosy trades at US$34.45, up 6 percent this year.
Other big riverboat operators include Pinnacle Entertainment, Isle of Capri and Aztar, which is also an Atlantic City mainstay.
Still, there are distinctive risks to investing in gambling markets outside Nevada. Relatively new gambling laws in some states could be more subject to change than those in Nevada, and taxes are higher. Nevada taxes gambling revenue 6.25 percent, while Midwestern states tax them at 20 percent to 35 percent.
For these reasons and because of the enduring popularity of Las Vegas as a travel destination, Wall Street has put a premium on casino operators with the heaviest concentration there. Mandalay and MGM Mirage each have four major properties on the Las Vegas Strip and derive well over half their earnings there.
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