Casinos: They've Got Game

Gaming stocks have been on a roll, but consolidation and lack of new capacity could break that winning streak

By Sam Stovall

Turning up once more in the : the S&P Casinos & Gaming subindustry. The group has been on a roll this year, with the subindustry index posting a 45.5% gain through Nov. 21, vs. an 18.9% rise for the S&P Super 1500.

And that strength may just continue. Tom Graves, who heads up the group of S&P Consumer Discretionary analysts, is modestly favorable on the overall investment outlook for casino and gaming companies.


  Graves notes that as states look to generate more revenue, they have made moves toward increased gaming taxes, including raising tax rates for casinos in Illinois, Indiana, and New Jersey. However, he generally sees announced tax increases and the prospect of higher taxes elsewhere as adequately reflected in the prices of gaming stocks for which S&P has analyst opinions. Also, Graves is pleased that gaming companies Harrah's Entertainment (HET ; recent price, $47) and Mandalay Resort Group (MBG ; $42) recently announced that they would each initiate a cash dividend.

In early July, 2003, a large new casino/hotel project, The Borgata, opened in Atlantic City, a joint venture of Boyd Gaming (BYD ; $17) and MGM Mirage (MGG ; $36). However, in the year ahead, Graves doesn't expect a big increase in new U.S. gaming industry capacity, and he anticipates further industry consolidation.

Casino gambling is now legal in more than 20 states, compared to just two states (Nevada and New Jersey) 11 years ago. 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, he sees a trend toward gaming machines being increasingly allowed at racetracks.


  Meanwhile, lotteries are currently operating in more than 30 states. For U.S. lottery-related outfits, long-term growth, in our 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 pari-mutuel companies (horse-track operators.)

Graves's favorites for capital appreciation in the Casinos & Gaming group include Harrah's, Mandalay, and Argosy Gaming (AGY ; $25), each of which is ranked 4 STARS (accumulate). MGM Mirage carries a recommendation of 3 STARS (hold), while Boyd is unranked.

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 Nov. 21, 2003.

Industry/Sector Company S&P STARS* Rank
Casinos & Gaming/Consumer Discretionary Harrah's Entertainment (HET ) 4 STARS
Computer & Electronics Retail/Consumer Discretionary Best Buy (BBY ) 4 STARS
Computer Storage & Peripherals/Info. Tech. Storage Technology (STK ) 4 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR ) 4 STARS
Diversified Metals & Mining/Materials Phelps Dodge (PD ) 3 STARS
Gold/Materials Newmont Mining (NEM ) 4 STARS
Homebuilding/Consumer Discretionary D.R. Horton (DHI ) 5 STARS
Internet Retail/Info. Tech. eBay (EBAY ) 3 STARS
Internet Software & Services/Info. Tech. Yahoo! (YHOO ) 3 STARS
IT Consulting & Services/Info. Tech. Unisys (UIS ) 3 STARS
Semiconductors/Info. Tech. Intel (INTC ) 5 STARS

* 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).

Stovall is chief investment strategist for Standard & Poor's

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