What kept going up, just had to come down - a bit

June 04, 2004 - With share prices of Las Vegas gaming companies rising astronomically and outperforming broader capital market indices over the past year, it should come as no surprise that profit taking sent the Applied Analysis Gaming Index (AAGI) tumbling in May after 13 consecutive months of gains.

The AAGI dropped 23.5 points, or a startling 8.8 percent, to settle at 245.01 as six of the eight publicly traded companies forming the composite index posted declines and the remaining two did not budge statistically. The AAGI base of 100 was set in January 1998.

While the market correction was not shocking, neither was a recovery as share prices started inching up at the end of the month when the declines eventually led to prices too sweet to pass up for investors in light of the continuing strong performance being turned in by both casino operators and game manufacturers. The May performance proved once again that when up is down in Las Vegas, down is surely not out by a long shot.

"It was a flattening out," says Brian Gordon, principal at Applied Analysis, the local market research and analysis firm. "The downward [movement] won't continue for any sustained period of time. Money enters the market when valuations dip. The visitor volumes are strong, room rates are strong and gaming revenues are strong. Nothing points to a change in the current course. It's back to the normal course of business."

Gordon says there was no significant news or events to gaming companies to trigger the May downturn. When most of the AAGI composite of five casino operators and three game manufacturers began posting record share prices, however, investors began converting some of their gaming stocks into profits in April and the profit taking continued into May.

Manufacturer Alliance Gaming led the way, as their average daily share price lost 26 percent in May over the prior month to land at $22.36. Game maker International Game Technology was second as it registered a 12.6 percent drop in the same period, with an average daily share price at $38.24 in May.

Mandalay Resort Group was the only casino operator to register a double digit percentage decline, with their May average daily share price of $53.55 a full 10.8 percent below the April price. Still, the average share price in May for all the companies on the index fell a minimum of 4.1 percent over April.

While the overall monthly drop for the AAGI in May was steeper than the broader S&P 500 index (8.8 percent versus 3 percent, respectively), the May AAGI stocks still looked shinier in the long view, up 57 percent from May 2003 compared to the 18 percent advance on the S&P 5000 over the same period. Average daily share prices were up over 50 percent for six of the eight companies year-on-year, with Station Casino and manufacturer WMS Industries more than double the price a year ago.

While gaming companies should continue the trend of healthy growth on an annual comparison, Gordon notes that the massive growth rates should diminish in the second half, when Las Vegas began its remarkable recovery out of the Iraq War shock in 2003.

Nonetheless, the analyst sees no major activity or announcements to hurt gaming stock in June and adds that the second quarter financial report on Mandalay Resort Group should indicate how Wall Street is really viewing the Strip.

Rising fuel prices coupled with an expected hike in interest rates from the Federal Reserve Board could, however, slow the general economy, which can't help but hurt the valley.

"When fuel costs rise, at some point people are going to feel it in the wallet and it may affect disposable income for leisure and travel expenditure," says Gordon. "We'll see how long it lasts. But coupled with rising interest rates, it may mean less cash out there."

Americans are falling for casinos

Whatever's happening to the stock price, casinos are as popular as ever with the people. According to a recent survey by the American Gaming Association (AGA), 53.4 million Americans visited 443 commercial casinos in 11 states last year, In fact, casino goers averaged 5.8 trips per person for a total of 310 million visits.

Not only do we go, but, as expected, we gamble, with gross gaming revenues slightly surpassing $27 billion, a $500 million, or almost 2 percent, rise over the previous year. In fact, Americans spent more on gambling than they did movies ($9.5 billion), movie rentals ($23.8 billion) or amusement parks ($10.3 billion), but gambling was still less lucrative than fishing ($41.5 billion) or cable TV ($51.3 billion). All that money means jobs, as commercial casinos paid out $11.8 billion in wages to 352,428 employees in 2003, a slight increase over the 350,957 dealers, cocktail waitresses and slot attendants working in 2002. Nevada had the lion's share of employees, with 192,812 people or more than half the national total, working in casinos.

If any politician wants to complain about it, their only gripe would have to be that they received none of the $4.3 billion paid out in direct gaming taxes, a $320 million, or 8 percent, increase over 2002. As anyone not paying state income tax knows, Nevada led the way, generating $776.5 million in taxes, an 8 percent increase over the $718.7 million raised the previous year.

If those same politicians still want to protest, it's not because they're listening to their constituents. Polling conducted by Peter D. Hart Research Associates and The Luntz Research Companies showed that more than 80 percent of Americans approve of gaming. In addition, 91 percent of casino visitors and 69 percent of people living within 10 miles of a casino say that the gaming industry is doing a good job eliminating illegal and underage gambling.

With the positive trends, you want to bet that someone makes a fuss anyway?

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Article Copyright ©: S. Mihailovich, Las Vegas Business Press