Analyst upgrades gaming industry

Stock prices for Las Vegas casino operators rose sharply today after a prominent Wall Street gaming analyst upgraded the sector.

Mirage Resorts Inc. led the rise as Brian Egger of Donaldson, Lufkin & Jenrette boosted his rating on the company to "top pick" among gaming stocks from "market perform."

Egger also increased his rating on the entire gaming sector to "outperform" from "market perform," citing improved economic fundamentals.

Mirage stock rose 87.5 cents, or 6.1 percent, to $15.1875, in early afternoon trading today.

Also trading higher were the shares of Circus Circus Enterprises Inc., up 4.8 percent; Park Place Entertainment, up 4.8 percent, and MGM Grand Inc., Starwood Hotels & Resorts Worldwide Inc, Harrah's Entertainment Inc. and Station Casinos Inc., all slightly higher.

Gaming-equipment maker share prices were mixed, though, as concerns about operator attempts to thwart the spread of revenue-participation games loom over that sector.

Egger said Mirage is poised to show strong earnings growth and generate significant cash flow that should enable it to pay down debt, strengthening its balance sheet.

While Mirage is expected to report fourth-quarter earnings that will reflect some preopening expenses and the loss of business from the Mirage hotel-casino to its new Bellagio, "We expect very strong earnings growth, perhaps at a 20 percent rate, for the next several quarters," Egger said.

"In the meantime, we expect the company to generate enough cash flow from its existing properties and the opening of Beau Rivage in Mississippi to be able to pay down about $700 million of debt over the next four years.

"We think Bellagio has gotten a bum rap from some people," Egger said. "Its retail and room-rate performance will be a little better than some people are expecting."

He said Bellagio will also benefit from the visitor demand stimulated by the openings of Mandalay Bay, which is located away from the "hottest" part of the Strip, and The Venetian, which will experience a "soft" opening in April without all of its attractions finished.

"We also believe the airline issue has been overblown," Egger said, referring to the miniscule growth in passenger seats into Las Vegas. He said seats should increase as demand rises among visitors eager to experience the new resorts.

But Dave Ehlers, chairman of Las Vegas Investment Advisors Inc., warned that an airline passenger-seat shortage still looms.

"There is growing evidence that Las Vegas may be emerging from its long slumber," he said, "but it's too early to bet the farm on a Las Vegas turnaround.

"Nonetheless, the data is certainly encouraging. If the air carriers will schedule sharply increased numbers of seats, then just maybe Las Vegas will have something decent to report for a change to Wall Street.

"But the possible sale of America West to United Airlines and the recent sale of Reno Air to American Airlines may tend to negatively impact total Las Vegas air carrier seats," Ehlers said.

"Should this happen, it would be most unfortunate because the air visitor arteries would continue to be clogged."

In announcing his new recommendations, Egger noted Mirage stock is mired at an eight-year low, and said even at his target price of $20 a share "would be in the bottom third of its range of valuations over the past 11 years."

Egger pointed to the same economic factors affecting Mirage for his upgrade on all gaming stocks, saying the sector is ripe for a mechanical correction, that positive earnings reports will benefit shares, that air-transport problems will be corrected and that the new resorts create positive economic values that are better than generally perceived.

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