Hotels Staying the Course

Steady as she goes.

That's the conventional wisdom for the rest of the year regarding large hotel companies and casino operators, which -- Thursday's events notwithstanding -- have been riding robust cyclical recoveries that should yield solid second-quarter results.

Business and leisure travelers continue to check into hotels, keeping occupancy levels high and enabling hoteliers to lift room rates and bolster profits. And with the supply of new hotel rooms expected to remain low over the next couple of years, room rates should continue to rise.

At the same time, gamblers, vacationers and conventioneers continue to flock to the key gaming market of Las Vegas, benefiting large casino companies, like MGM Mirage (MGM) and Harrah's Entertainment (HET), that have flagship properties there.

That said, some investors have grown jittery about a potential slowdown in Las Vegas in the second half of the year. Bear Stearns analyst Joseph Greff last week downgraded MGM Mirage shares, saying growth in room rates in Las Vegas appears to be decelerating.

As always for the lodging and gaming sectors, key variables remain the economy and the potential that terrorist attacks could disrupt or discourage travel. A sharp economic downturn could curtail business travel spending and cause consumers to cut back on vacations and casino visits.

The deadly rush-hour bomb blasts in London pressured hotel stocks Thursday. But analysts said the apparent terrorist attacks likely won't have a significant long-term impact on U.S. hoteliers. They estimate these companies derive a small portion of operating profits -- 4% or less -- from U.K. hotels. They also note lodging stocks bounced back after previous disruptions like the March 11, 2004, Madrid train bombings.

Second-quarter results, which start trickling out this month, should provide a good indication of general trends likely to continue through the rest of the year.

"Particularly for the hotels, the second quarter should be good," says Thomas Graves, an equity analyst at Standard & Poor's. "Profitability should be helped by higher room rates. Those tend to flow more to the bottom line, whereas higher occupancy can have incremental costs associated with it."

Big casino operators Harrah's and MGM Mirage should also report significant profits.

Sifting through their earnings reports could prove a little tricky this time around, however. Graves notes that both companies recently completed blockbuster mergers, and analysts will want to exclude one-time merger costs from earnings. In addition, it's too soon for earnings to reflect all of the benefits the mergers may bring. (Graves doesn't own shares or have any affiliation with companies he covers.)

Harrah's $6.8 billion purchase of Caesars Entertainment closed last month, after the April closing of MGM Mirage's $7.9 billion acquisition of Mandalay Resort Group.