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Casinos Giants on a Roll

With gaming industry high-rollers Harrah's Entertainment (HET) and MGM Mirage (MGG) posting record earnings every quarter so far this year, investors might wonder when the companies' luck will run out.

Nevertheless, some on Wall Street think there's still plenty of growth ahead, as well as upside for these industry leaders' stocks -- what with the Las Vegas economy roaring along and the potential that Harrah's and MGM Mirage's pending purchases of Caesars Entertainment (CZR - Get Report) and Mandalay Resort Group (MBG), respectively, will yield long-term earnings power for investors.

Earlier Wednesday, Harrah's reported record third-quarter net income of $118.8 million, up 19.4% from $99.5 million a year earlier. Earnings per share were $1.06, compared with 90 cents in the year-earlier quarter, and adjusted EPS of $1.09 was a nickel better than the $1.04 average analyst estimate. As per its standard practice, Harrah's declined to provide forward guidance.

Harrah's saw strong demand at its Las Vegas casinos, but also had better-than-expected profits from riverboat casinos, noted Harry Curtis, a J.P. Morgan analyst, in a research note.

Harrah's stock is near the high end of its $44.00 to $56.00 range navigated in the past three months. The 52-week high is $57.50.

There's still room for it to rise, wrote Curtis, who has an overweight rating on Harrah's shares. (J.P. Morgan does business and seeks to do business with the companies covered in its research reports.)

At current levels, Harrah's trades at 7.4-times 2006 EBITDA, or estimated earnings before interest, taxes, depreciation and amortization -- below the stock's historical trading range of 8.0 to 8.5 times earnings, the 9 to 10-time multiple for MGM Mirage and 9-plus multiples for smaller, less-diversified companies such as Station Casinos (STN - Get Report) and Boyd Gaming (BYD - Get Report), the analyst wrote.

"We believe investors should focus on 2006 because it represents the first full year Caesars and Horseshoe will be included in Harrah's results," he added. "We believe the minimal multiple Harrah's should be valued at is eight times, which would suggest significant upside in share price over the next 12 months."
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