Casinos Are on a Roll

Sin was in at large investment houses during the third quarter, with many rotating into the casino sector.

An analysis of 13-F filings -- the quarterly equity holdings filed to the Securities and Exchange Commission by institutional investment managers with more than $100 million in assets -- shows that institutions boosted their net positions in the gaming space by 2%, or $623 million, in the third quarter.

"What's important is that institutions think that gaming is a good place to put money. A lot of the net buyers have been the big funds," said Eric Hausler, gaming and lodging analyst at Susquehanna Financial Group, which produced the research. "You've seen longer-term investors buying in big blocks with lots more volume." (Susquehanna makes markets and holds some of the stocks it covers, but doesn't seek investment banking from the companies it covers.)

Indeed, according to Hausler's research, institutions spent $3.7 billion on gaming and gaming-related stocks in the third quarter. But with the Dow Jones Casino and Gaming Index up more than 70% since its March low, institutions have been taking profits as well, selling $3.1 billion in casino and gaming stocks during the period.

"In a sense, what we've seen is a real rotation, but you need to look at this in two stages. People were buying in and around the Iraq war when these names were cheap and valuations reflected uncertainty," said Hausler. "Based on better earnings, people bought in. As you've seen, it's been a great performing sector, so you're also seeing some funds take some money off the table with the end of the year coming up."

More Than Just Las Vegas

Overall, Hausler said a number of the things that had investors spooked a year ago, such as fears that more states would join Illinois in drastically hiking gaming taxes, have not materialized. Meanwhile, the gaming industry has done a number of things to make itself more attractive to institutions, such as establishing dividends, locking in long-term growth plans and giving clear earnings guidance.

Taking a Gamble on Casino Stocks? Here's a look at some of the bigger names in the sector, with key information on dividends, valuation and long-term growth prospects
Company	Dividend	P/E*	Gain From Lows**	Long-Term Growth Estimate
Boyd Gaming	2.0%	12.0	+72.5%	+15%
Dow Jones Casino and Gaming Index	0.5	18.7	72.5	14
Harrah's Entertainment	2.8	13.8	52.6	13
International Game Technology	1.4	22.5	83	15
Mandalay Resorts	2.7	15.5	63	15
MGM Mirage	None	20.6	45.4	15
Park Place Entertainment	None	17.3	55.7	10
Pinnacle Entertainment	None	N/A	117	10
Station Casinos	1.6	18.2	64.2	16
* -- Vs. projected 2004 earnings ** -- Covers span from March 12, 2003, through Nov. 31, 2003. Source: Baseline, TSC research

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