Big Six Post Record Profits

LAS VEGAS -- The "Big Six" gaming operators are starting 2006 with record-breaking profits, up nearly 45 percent from the first quarter 2005, thanks to surging demand for Las Vegas as a destination, strong table play in casinos and the two biggest mergers in industry history, analysts said this week.

With the major casino companies set to begin reporting first-quarter earnings next week, analysts are predicting that the combined net income for the six largest Nevada-based gaming companies will have surged to $572 million, up 44.8 percent from $395 million in the 2005 first quarter.

Deutsche Bank analyst Marc Falcone said the earnings forecasts for the first quarter, as well as the remainder of the year, are on the conservative side because economic fundamentals are proving to be stronger than expected.

"Growth (in the first quarter) was substantial, with regional markets benefiting from the mild winter and Las Vegas getting a boost from increased high-end play," he said.

The Big Six gaming companies are Boyd Gaming Corp., Harrah's Entertainment, Las Vegas Sands Corp., MGM Mirage, Station Casinos and Wynn Resorts Ltd.

Penn National, a major gaming company not based in Las Vegas, also enjoyed substantial growth, with first-quarter net income of $46.7 million, up 77.4 percent from $26.3 million a year earlier, analysts said.

The Las Vegas-based Big Six are expected to report combined revenue of $5.9 billion in the first quarter, up 55.7 percent from $3.8 billion a year earlier.

And cash flow -- earnings before interest, depreciation, taxes and amortization -- should have increased to $1.9 billion, up 58.3 percent from $1.2 billion in the first quarter of 2005.

Brian Gordon, a partner in Las Vegas-based financial consultants Applied Analysis, said each operator has benefited over the past three months from decent increases in visitor volume, shifts in convention business out of the Gulf Coast area and increased spending by individual visitors.

"In aggregate, we're seeing growth rates in the teens across the board. We're expecting to see that level of growth in the gaming sector in the first quarter as well," he said. "The growth demonstrates healthy fundamentals in the economy, but we don't expect to see growth in the 20-plus percents any more. That kind of growth can't sustain itself. At the same time, we have yet to see any material declines for gaming operators."

Increased spending at the higher end of the gaming market has been particularly important for sustaining growth, he said, citing both heavy baccarat volumes and robust room rates.

Susquehanna Financial Group analyst Brian McGill said casino operators have been doing a good job of getting players who will spend more, even if increases in the number of visitors have moderated.

"There are not huge increases in the numbers (of visitors), but you're seeing more profitable guests," McGill said.

That's the reason for the emphasis operators are placing on overall spending rather than just revenue per available room in their hotels, he said. McGill also said the market is still feeling an effect from the opening of Wynn Las Vegas less than a year ago.

Partially as a result, there has been a hefty increase in baccarat play and the volume wagered on higher-end table games, he said.

Standard and Poor's, the national credit rating service, last week predicted continued growth through 2006, driven mainly by strong consumer spending, despite downward pressure from higher interest rates and energy costs.

However, it said the rate of revenue growth in gaming will moderate, given a likely slowdown in the U.S. economy.

As a result, S&P expects that gaming companies on average will generate mid-single digit gaming revenue growth the rest of the year.

Falcone said that national, macroeconomic trends -- high oil and gasoline prices and higher interest rates -- could take a toll on the gaming industry later in the year.

"Historically, there has been no correlation between national (economic) trends and gaming, but we're going to have to be cognizant they could affect gaming revenue growth in Las Vegas," he said, predicting high-single digit growth starting in May.

McGill was more optimistic, predicting double-digit growth for the remainder of 2006, even with a slowdown that is expected to start during the slower summer months.

Goldman Sachs analyst Steve Kent was especially bullish on Las Vegas operators, as opposed to manufacturers, particularly Las Vegas Sands and Station Casinos, based on their growth plans, return-oriented management teams and unique positioning in their respective markets.

He stressed the strong gaming trends in Las Vegas, Atlantic City and Macau, plus expansion plans now in the works or expected to be announced later in the year.

Kent said slot manufacturers should report a fairly benign quarter since the market for replacement machines and new slot additions continues to be relatively soft.