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'Big Six' Mostly Steaming Straight Ahead

24 Jul 2006

By Rod Smith

In an unexpected twist, the Las Vegas locals market should be the only weak link in an unbroken chain of record-breaking profits as the "Big Six" gaming operators begin reporting their second-quarter financial results next week.

Morgan Stanley analyst Celeste Brown said weak housing markets in Las Vegas and Southern California have tripped up locals operators here.

Otherwise, analysts credit surging demand for Las Vegas as a destination and the two biggest mergers in industry history for keeping up the overall record-breaking pace.

Profits for the Las Vegas-based industry leaders are expected to surge to a record $554 million, up 34 percent from a combined $413 million profit a year earlier.

The Big Six companies are Boyd Gaming Corp., Harrah's Entertainment, Las Vegas Sands Corp., MGM Mirage, Station Casinos and Wynn Resorts Ltd.

Deutsche Bank analyst Bill Lerner said the overall quarterly performance of the companies will demonstrate how resilient the gaming consumer is.

"You'll see more relative strengths in Las Vegas than in regional markets, but overall it'll be a very good quarter, certainly from a revenue perspective and also (profit) margins," he said.

Combined revenues for the casino giants should hit an all-time high of $6.2 billion, up 41 percent from $4.4 billion a year earlier.

Likewise, cash flow, generally defined as earnings before interest, depreciation, taxes and amortization, should climb to $1.8 billion, up 29 percent from the 2005 second quarter.

Brian Gordon, a partner in Las Vegas-based financial consultants Applied Analysis, said the gaming industry managed for yet another quarter to extend a phenomenal, three-year growth rate.

"We're coming off the heels of rapid expansion and continued consolidation that have evidently piqued the interest of consumers," he said.

Harrah's Entertainment bought out Caesars Entertainment and MGM Mirage bought out Mandalay Resort Group a year ago, to form the largest and second largest gaming companies in the world and in history.

"The position Las Vegas is in is better than it's ever been from a visitor's and a consumer's point of view," Gordon said.

Bear Stearns analyst Joe Greff in an investor advisory said another factor is the upward trend in high-end gaming, stemming from a large influx of Asian players.

"We attribute the growth from Asia to an emergence of significant affluence in the region and more marketing to the region from the major Las Vegas high-end operators," he said. "Our sense is that the high-end pie has grown about 20 percent over the last year or so due to growth from Asia."

Morgan Stanley's Brown said the industry as a whole is doing well for all these reasons and is performing up to or surpassing expectations.

"The data everywhere has been strong. The only weakness has been the Las Vegas locals market," she said, referring to Boyd Gaming and Station Casinos.

Boyd Gaming's net income in the second quarter is expected to rise 4 percent to $51 million, below Wall Street expectations although up from $49 million a year ago.

And Station Casinos is expected to report a dip in net income to $39 million, down 4 percent from the 2005 second quarter.

Lerner took issue with the notion that the locals market here is weak, although he acknowledged the sentiment is widely accepted on Wall Street.

"Boyd (Gaming) has company-specific issues with new competition in Summerlin, slower than expected (ramping up) at South Coast and business disruptions at the Borgata (from a state shutdown in New Jersey)," he said.

As for Station Casinos, Lerner said its underlying business is robust even as the company ramps up its new Summerlin property, Red Rock Resort.

Gordon also pointed out that part of Station Casinos' soft net income performance in the second quarter was due to the cost of opening of Red Rock Resort, which has been getting rave reviews and is expected to boost the company's performance in the long run.

Nevertheless, Brown attributed the newfound weakness Wall Street analysts see in the locals gaming market to the "wealth effect" of tumbling real estate markets here and in Southern California, where many Las Vegas residents still have investment properties.

She said the effect of weak real estate markets in both areas swamps the effect of rising gasoline prices, although both figure in consumer decisions, including taking vacations or not taking them.

Net income for Harrah's Entertainment is expected to swing up to $186 million, a 150 percent increase over $74 million in the 2005 second quarter.

Brown said there are no signs of weakness in Harrah's Entertainment's Las Vegas properties, which cater to out-of-town visitors, and that declining consumer confidence has not taken a toll on regional gaming markets.

In addition, Harrah's Entertainment has benefited from the expansion of its Total Rewards program and better management at the former Caesars Entertainment properties, including Caesars Palace.

Looking forward, Lerner said the gaming industry should see "more of the same" in the year's second half.

"Again, we're going so see how resilient the gaming customer is. The booking window is pretty decent for the next few months from a convention and (independent leisure traveler) perspective," he said.

Still, Lerner warned that while Las Vegas' prospects are strong, more caution is warranted for regional markets which are more sensitive to interest rates and fuel prices.

Brown said Harrah's Entertainment should continue to reap the same rewards in this year's second half.

And she said Harrah's announcement this fall of its Las Vegas and Atlantic City capital expenditure projects is likely to be a master plan instead of one giant redevelopment.

Greff was similarly positive on MGM Mirage, predicting the company would benefit from "solid trends" on the Strip and significant increases in the volume of high-end gaming from Asian visitors.

Gordon, however, cautioned that current rates of growth cannot be sustained.

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