Dan Ahrens bullish on gaming fund

Jan 22, 2008 11:00 PM

By David Stratton | There’s an adage in the casino industry that hard times won’t stop gamblers from betting. By contrast, a proverb states that the wages of sin are, well, let’s say they’re not tax deductible.

Regardless of which philosophy you subscribe to, investing in "sin" stocks such as those in the gaming industry, is considered a safe bet by many analysts as the U.S. economy slows.

Historically, the roar of a bear market often rings hollow with sin stocks. During the 2000-02 downturn, for instance, Standard & Poor’s Casinos and Gaming index gained 115%, while the S&P 500-stock index plunged 47%.

One reason shares of gaming-related companies are less susceptible is that it’s hard to break into the business. Governments limit the number of casino licenses and have cracked down on Internet gambling.

Meanwhile, the mushrooming middle classes in developing nations such as China and India are boosting demand for casinos and gambling in general. Most recently the prospect of expansion to Asia has been a key factor driving up casino stocks.

Gaming stocks with the most potential share some common traits. Each company is large and has a global reach – the more exposure to emerging markets, the better. The companies have enough clout to make acquisitions in their consolidating industries and generally are so strong that they don’t have to tap unstable credit markets for financing.

 Even though gaming stocks are off to a rocky start in 2008, experts predict the lull is temporary and that a "solid comeback" fueled by strong earnings is on the horizon.

"The recent sell-off in gaming stocks is vastly overdone," said Dan Ahrens, portfolio manager for the Ladenburg Thalmann Gaming and Casino Fund, the only U.S. mutual fund that focuses on gaming and casino industries. "I’m bullish at current price levels and think that gaming stocks will return to favor like they’ve done many times before.

"We’ve seen this pattern time and time again that once we see real numbers from monthly gaming revenue and quarterly earnings, people again realize that high-end gaming revenues are very resistant to economic slowdown, and gaming stocks should see a strong rebound," Ahrens said.

Ahrens in 2006 founded the Ladenburg Thalmann fund, a multi-cap fund that seeks long-term growth on all sides of gaming and wagering. This includes Las Vegas, regional and international casinos, pari-mutuel betting, gaming manufacturers and video game developers.

Often called upon for his opinion on the gaming industry, Ahrens is a frequent guest on business-related news broadcasts on Fox News, CNN, CNBC-TV, ABC News and Bloomberg TV, and he is often quoted in news articles that appear in the Wall Street Journal, New York Times, Barron’s, the Economist and Investor’s Business Daily.

With an impressive 20-year track record in mind, Ahrens evaluates the prospects for high-stakes stocks in the gaming industry.

Stocks of large, Las Vegas-based casino operators cooled this past fall, but the declines are relatively minor compared with the previous run-ups, Ahrens said. Consider, for example, Las Vegas Sands, which, at $119 in mid-December, still trades for nearly three times what it fetched only two years earlier.

Much of the long-term growth of Sands, as well as MGM Mirage and Wynn Resorts, is hinged on how well those companies’ casinos fair in Macau.

Ahrens says that whether MGM, Sands and Wynn deserve their lofty share prices depends on their ability to generate rapid revenues and profit growth at their Macau properties. And that, in turn, depends on their ability to sell Las Vegas-style gaming in Macau.

Most of Macau’s gamblers are day-trippers who bet big at table games. "Las Vegas Sands could … hit some home runs with future projects," Ahrens said, adding that Sands will up the Asian ante when it opens its first casino in Singapore in 2009.

Ahrens also likes Wynn’s chances because chief executive Steve Wynn has a proven ability to lure high rollers to his casinos, although the company’s pipeline of new projects isn’t as large as that of Las Vegas Sands.

Ahrens also likes MGM Mirage’s prospects, which is less dependent on overseas results. The Las Vegas-based company owns some of the newer properties on the Strip, including the Bellagio, Mandalay Bay and the MGM Grand, and it is currently building the massive CityCenter property in Las Vegas.

"MGM’s Macau business is more of a bonus," Ahrens said.

In addition to casino operators, Ahrens and the fund he manages are bullish on gaming equipment manufacturers.

Anyone who’s ever pulled the handle on a one-armed bandit probably did it on a machine manufactured by International Game Technology (IGT). The Reno-based firm produces nearly 70% of all slot machines in North America.

Over the next five years, the international market for electronic gaming machines is expected to explode, even surpassing the North American market.

But IGT’s ace in the hole is server-based machines. Traditional slot machines are self-contained computers; but slots controlled by a central server allow casinos to choose from a wide array of games and easily customize odds and game prices.

That technology is expected to increase revenues for IGT in 2009, when many domestic casinos are expected to begin the changeover from traditional slots.

At that point, experts predict, the sky’s the limit for IGT and similar manufacturers.