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Gaming Stocks Still Look Like Winners

By Richard Diennor Is now the time for investors to bet on gaming and casino stocks? Many analysts and money managers have a lukewarm outlook for these industries in the near term. Their lack of enthusiasm only partly stems from the impact of Hurricane Katrina, which destroyed or badly damaged a number of gambling properties in the Gulf of Mexico.

Looking out a few years, however, observers believe gaming operations have the potential to thrive, even in parts of Louisiana and Mississippi that were ravaged by the storm.

Standard & Poor's had a "neutral" opinion of the gaming industry before Katrina hit, and it maintains that stance. These stocks had appeared to be -- and still seem -- "appropriately priced," says Thomas Graves, the S&P analyst who follows casino and lodging companies.

LOOSING STREAK. Joseph Fath, a gaming and lodging analyst with T. Rowe Price Group (TROW), a mutual fund and investment management firm, says he would view casino stocks with caution over the next 12 months. He thinks financial results for companies with operations in the Gulf states could become "very messy" over the next couple of quarters, as they make storm-related "pro-forma" adjustments to earnings.

Still, gaming and casino companies with little or no exposure to Katrina should do well in the long run if consumers continue spending, Fath says. "When you look at the fundamental data and break them down, there really hasn't been an impact on demand yet," he said.

Industry observers say that, at most, 5% of the gaming and casino industries' revenues and profits are generated from facilities in the Gulf states, so Katrina's effect shouldn't be significant.

INSURANCE PAYOUTS. Two of the biggest players in the sector, Harrah's Entertainment (HET

; S&P investment rank 3 STARS, hold; recent price, $70) and MGM Mirage (MGM

; 3 STARS; $45), have a handful of properties in areas affected by the hurricane, but the majority of their facilities are located outside the region.

Fath and Graves each note that companies hurt by the storm should be able to recoup some of their losses from property and business-interruption insurance. Daniel Ahrens, who manages the Vice Fund (VICEX), is also optimistic about gambling companies' long-term prospects.

"I think gaming overall still has a lot of upside potential," Ahrens says, whose $48 million fund had about 25% of its assets in gaming and casino stocks at the end of August. The portfolio's largest holdings at the time included slot-machine maker International Game Technology (IGT

; S&P investment rank 2 STARS, sell; $27).

SOLID GROUND. Ahrens expects gaming and casino outfits to benefit as an aging American population retires and spends more of its disposable income on leisure activities. These businesses will also get a boost as more states turn to gambling activities as a source of taxable revenue, he figures. "I think gaming overall is still booming. And I don't think it's a saturated market," says Ahrens.

Despite the damage to casinos in the Gulf Coast, some owners have said they are considering rebuilding bigger and better facilities. Because of the threats posed by hurricanes, industry observers expect companies to lobby to build on land (currently, state laws in Mississippi and elsewhere require casinos to be located on water). Building on solid ground would also afford companies a wider choice of locations, observers say.

Gamblers and tourists will return to the Gulf of Mexico, too, but it may be several years before the gaming and casino industries in the region begin doing as much business as they did before Katrina blew through the are, observers say. Says S&P's Graves: "I think it's going to be a slow process."

Diennor is a reporter for Standard & Poor's Global Editorial Operations

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