Casino Stocks Riding High

"We think that this will be very important to the long-term capital structures and balance sheets of these companies," said Marc Falcone, gaming analyst at Deutsche Bank.

As a result of the rising Revpar gains, nearly every casino name in the Dow Jones Casino Index is at or near a 52-week high. But even as earnings estimates climb, share prices are moving in lockstep, which makes some of these companies appear pricey, depending on the valuation metric used.

On a price-to-earnings basis, the Dow Jones Casino Index currently trades at 26 times 2004 earnings expectations, which is at the high end of its five-year average P/E range between 29 and 9 times future earnings, according to Baseline. And on a price-to-cash-flow basis, the Dow Jones Casino Index appears overvalued, trading at 17.2 times cash flow double its five-year historical average of 8.5, according to Baseline.

But Wall Street analysts value casinos using earnings before interest, taxation, depreciation and amortization because they own land and other assets. On this basis, casinos don't seem as expensive, with the large-cap operators trading between 8 and 9 times 2004 EBITDA, in line with the long-term average, according to Smith Barney research.

And through the fourth quarter, recent research from Susquehanna Financial Group shows that institutional investors were continuing to invest in the sector. According to a report from analyst Eric Hausler, institutions managing $100 million in assets increased their net positions by $236 million, resisting the urge to take profits in a sector that performed well.

"It's telling that very few institutions reduced their position in gaming to zero," said Hausler. Even investors who cashed out left some money on the table, because they believe there is still more upside in the sector."