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Analyst: 'Bulls' in gaming's future

May 20, 2008 7:04 PM

By GT Staff | In the wake of slumping first quarter revenues, gaming stocks continue to take a beating on Wall Street. Of the 12 largest US-traded gaming companies, only two posted positive returns in the first quarter of 2008 – WMS Industries and Melco PBL.

There’s no doubt the anemic economy has contributed to declining casino revenues, especially in Nevada and Atlantic City.

But some experts believe the revenue declines, though significant, should not have justified the hammering most gaming stocks took over the past few months.

"I wouldn’t exactly say the sky is falling, though many in the mainstream press would lead you to believe that it is," said Dan S. Ahrens, president of Ahrens Advisors and portfolio manager of the Ladenburg Thalmann Gaming and Casino Fund. "In time, gaming stocks should ‘revert to the mean’ as … recent poor performance is certainly out of the norm."

Ahrens added that the downturn should soon bottom out, creating great investment opportunities in gaming stocks over the next six to 12 months.

"Coming out of market bottom, whenever exactly that is … stocks that have been oversold on fears and momentum will lead the way in a market rebound," Ahrens said.

Ahrens cited several reasons why he believes stocks will bounce back sooner rather than later.

First, year-over-year comparisons will be favorable. "We must always realize that gaming revenues are constantly compared one year over the other," Ahrens said. "We recently compared March 2008 in a weak economy to March 2007 in a stronger economy.

"Very soon, the periods that (gaming companies) have to beat will be the weaker time periods we’ve just suffered through."

Ahrens said there’s no reason to believe gaming revenues will continue to decline from already reduced levels.

"The highest quality operators like Pinnacle and Boyd may look seriously undervalued when they get their chance for revenue growth against these favorable comparables," Ahrens said. "In fact, even the smaller regional and locals market operators that have been hit the hardest may look great in six to 12 months when they have the opportunity to beat a very weak fourth quarter of 2007 or first quarter of 2008."

As gaming revenues and corresponding stock prices have dropped, so have revenue expectations. This reduced level of expectations – on the part of investors, stock analysts as well as the gaming companies themselves – will make it easier for companies to hit target earnings and to post positive quarterly results.

Tumbling stock prices have shown that the gaming industry is no longer "recession proof," not in the literal sense, Ahrens said.

Because the largest gaming operators now get more than half of their income from non-gaming sources – hotel rooms, restaurants, entertainment, spas, retail, etc. – they have become "susceptible to economic downtown."

Nonetheless, Ahrens said, a segment of the gaming industry’s revenues may be nearly recession proof – revenue from serious gamblers, VIP gamblers and foreign tourists.

And, those companies that cater to those market segments will have a competitive advantage, even in a slow economy.

"Companies such as MGM Mirage, Las Vegas Sands and Wynn Resorts, with international focus and high-end, top properties are due for strong rebounds," Ahrens said. "With today’s reduced prices and moderated earnings expectations, I feel there’s a great buying opportunity in gaming stocks."