Casinos Are on a Roll

With a slew of new gaming licenses likely, the industry is set to expand.

With state finances in the red and a slew of new pro-gambling governors in office, 2003 could turn out to be a big year for gaming industry expansion. Slot machines are likely to pop up at racetracks in Pennsylvania, New York, Massachusetts, and Maryland, while Illinois and Missouri are considering issuing more casino licenses.

One company that has seized on such opportunities is Harrah's Entertainment Inc. (HET ), the Las Vegas-based gaming giant that operates 26 U.S. casinos. Harrah's is a favorite of Mark Greenberg, portfolio manager of the $733 million Invesco Leisure Fund. The company's operations are well-diversified, with casinos in New Jersey, Illinois, and Mississippi as well as Nevada. It is taking advantage of Indian gaming expansion by managing properties for tribes in California and other states. Harrah's is expected to report earnings of $3 per share in 2002 and $3.23 in 2003, according to Wall Street analysts. That gives it one of the better growth rates among the large casino operators.

A Harrah's rival, Park Place Entertainment Corp. (PPE ), also looks promising. John Miller, an analyst at Ariel Capital Management Inc. in Chicago, says his firm began buying Park Place stock in October at under $7 a share, down from the 52-week high of $12. He thinks the stock has been unfairly hit due to a construction snag at Park Place's Caesars property in Las Vegas, where it is building a specially-designed theater for singer Céline Dion. Once the construction is done, says Miller, Park Place could be at $12 again.

Todd Griesbach, an analyst at Liberty Wanger Asset Management, is a fan of Station Casinos Inc. (STN ), the leading operator of casinos catering to Las Vegas residents. Station's new properties include amenities such as movie theaters and day spas. It has another card up its sleeve: a potentially lucrative deal to run an Indian casino in Sacramento. Station is expected to earn $1.02 per share in 2003, up from 68 cents in 2002.

Bear, Stearns & Co. gaming analyst Jason N. Ader is less interested in casino operators than he is their equipment suppliers. His top pick is International Game Technology (IGT ), the world's largest slot machine maker. "For the casino companies, there's a lot of potential new competition," says Ader, who does not own IGT nor does his employer have a banking relationship with the company. "Slot machine makers are better positioned, because they benefit no matter who wins or loses." Ader thinks growth in new markets will allow IGT to earn $4 a share for its fiscal year ending September, 2003, and $5 a share by 2005. IGT, which now trades at $73, is "a potential $100 stock," he says.

Also supplying the casinos is Shuffle Master Inc. (SHFL ), a $56 million-a-year maker of card-shuffling machines. Shuffle Master has some new products, such as single-deck shufflers for poker tables and proprietary card games like Let It Ride and Three Card Poker, that it leases to casinos. Griesbach thinks Shuffle Master will earn 95 cents per share in the October 2003 fiscal year, up from 77 cents in 2002.

Lots of people still consider the stock market a gamble. When you invest in casino stocks, you're betting with the house.

By Christopher Palmeri

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