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Lady Luck Smiles on Investors

By Sam Stovall There's no question that stocks of casino operators and other gaming outfits have been on a roll. Year-to-date through June 18, the S&P Casinos & Gaming industry subindex -- a member of S&P's industry momentum list for quite some time now -- was up 14.5%, vs. a 2.3% rise for the S&P 1500. (And the subindex didn't do so badly in 2003, rising 56.7%, vs. a 27.4% gain for the 1500.)

The recent strength reflects a sharp rise in shares of Mandalay Resort Group (MBG

; $68) in the wake of the June 4 announcement of an offer by MGM Mirage (MGG

; $48) to acquire that company. (The two companies announced a definitive acquisition agreement on June 16). Thomas Graves, CFA, S&P's Consumer Discretionary sector group head and gaming analyst, says the overall investment outlook for the gaming stocks S&P follows is modestly positive -- but its opinions on individual issues vary.

NEW GAMES, SAME MARKETS. One concern for casino investors: potential tax increases. As states look to generate more revenue, S&P has seen some movement toward increased gaming taxes, including higher tax rates for casinos in Illinois, Indiana, and New Jersey. However, Graves generally see announced tax increases, and the prospect of further tax-rate changes, being fairly reflected in the gaming stocks for which S&P has analyst opinions. Also, he anticipates that some gaming stocks will benefit from expectations of favorable company cash flows, including the payment of cash dividends to shareholders.

Some major new gaming facilities have entered the market. One of the largest recent additions to industry capacity occurred in July, 2003, when the Borgata casino/hotel project opened in Atlantic City. Between now and mid-2005, S&P expects that the largest new gaming project debuting will be a $2.4 billion casino/hotel project in Las Vegas being developed by Wynn Resorts, with an expected April, 2005, opening. Meanwhile, Graves notes, casino gambling is now legal in more than 20 states. Still, Las Vegas and Atlantic City remain by far the biggest U.S. casino markets, with Atlantic City more weighted toward daytrippers.

In the future, Graves expects that California casinos on Native-American land will become a more significant industry factor. Also, S&P sees a trend toward gaming machines being increasingly allowed at racetracks.

LOTTO LUCK. As for other forms of gaming, Graves points out that state lotteries are currently operating in over 30 states. For U.S. lottery-related companies, long-term growth, in S&P's view, is most likely to come from international markets and from the introduction of new games in existing markets. S&P does not have stock recommendations on any horse-race wagering companies.

S&P's top choices in the group are industry heavyweight Harrah's Entertainment (HET

; $53) and a smaller player, Argosy Gaming (AGY

; $34). Each is ranked 4 STARS (accumulate). Graves has 3-STARS (hold) opinions on both Mandalay and MGM Mirage.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of June 18, 2004.




Recent Price

Casinos & Gaming/Consumer Discretionary

Harrah's (HET)



Catalog Retail/Consumer Discretionary

Insight Enterprises (NSIT)

Not Ranked


Consumer Electronics/Consumer Discretionary

Harman International (HAR)



Diversified Metals & Mining/Materials

Peabody Energy (BTU)



Fertilizers & Ag. Chem./Materials

Scott's (SMG)



Internet Retail/Consumer Discretionary




Internet Software & Services/Info. Tech.

Yahoo! (YHOO)



Motorcycle Mfrs./Consumer Discretionary

Harley-Davidson (HDI)



Oil & Gas Refining/Mktg./Energy

Premcor (PCO)




Nucor (NUE)



Technology Distributors/Info. Tech.

Avnet (AVT)



Wireless Telecom Svcs./Telecom Svcs.

Nextel Communications (NXTL)



* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Required Disclosures:

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

For Required Disclosure information and Price Charts for all STARS ranked companies go to, click on "Investment Research", and then click on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts".

Additional information furnished upon request to Standard & Poor's.

Disclaimer: This material is based upon information that Standard & Poor's considers to be reliable, but neither Standard & Poor's Investment Advisory Services LLC nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Stovall is chief investment strategist for Standard & Poor's

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