Report Card: Jason Ader

Jason Ader Bear Stearns
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1st Place Casinos and Gaming

Bio

B.S., M.B.A., New York University. Ader has covered the lodging, gaming and leisure industries for Bear Stearns since 1995. Prior to that he was an equity analyst at Smith Barney from 1993 to 1995; with Baron Capital, 1991 to 1993; and with Sun America, 1988 to 1991.

Industry Outlook and Style

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While the gaming sector has enjoyed very strong performance since 1999, Ader says the industry requires new supply to drive demand. "You had five major new casinos open in the last two years, and now there's really nothing new being built in the Las Vegas market. So the casino operating business is decelerating, coupled with the economic slowdown."

And just how does the analyst expect a continuing slowdown to affect the group? Las Vegas, he anticipates, will have some exposure to the business cycle, as companies look to cut costs and send fewer employees to conventions. But gaming, he counters, is a strong sector "because it is a very good value and, as a product, offers the consumer an opportunity to actually make money, so there is a recession-resistant quality as a result."

Among the various gaming markets, Ader sees Las Vegas and the Chicago riverboat market as the two strongest areas. "I think the Las Vegas strip is among the most vibrant markets in the entertainment industry, and the companies that own the leading properties in the Las Vegas strip market are best-positioned going into an economic downturn."

The Bear Stearns analyst says two companies look strongest in the current climate: his top pick, International Game Technology(IGT), as well as MGM Mirage(MGG). (Bear Stearns has done investment banking for MGM Mirage but not for IGT.)

Among the reasons he likes IGT: In his view, the slot machine business has the most exciting growth prospects of any other gaming activity in the next year. As for MGM Mirage, the company controls leading Las Vegas strip properties, he says. He adds that MGM continues to enjoy "the benefits of synergy savings from the acquisition of the Mirage properties, where the economies of scale, the revenue enhancements and the cost-savings will continue to hit the income statement for the next 12 to 18 months."

The biggest risk to the casino industry is the present lack of capital spending, Ader says. He estimates that as a result of this capital-spending freeze, the industry will generate $1 billion in free-cash flow this year, the largest level in its history. The risk to investors is that casinos may start to spend money on projects yielding low returns as a result of competition, he says. "So if the industry starts to go into a build mode again, multiples could contract and, therefore, gaming companies and their investors would be subject to a higher degree of downside." But, he says, most of these companies have adopted a fairly disciplined approach to their spending and will require that capital projects yield returns of 15% or better.

Stock Pick

Favorite stock for next 12 months: International Game Technology
Comment:
"There are a couple of things going on here: First, California has allowed slot machines on Indian reservations, so you've got Indian gaming there. You've got some great new technology that has made the games actually perform substantially better than the machines being replaced, and IGT has licensed names such as Wheel of Fortune, I Dream of Jeannie and Jeopardy! -- and developed them into slot machine games for the casino markets.

"Additionally, the innovation of cashless gaming, a new product being tested in the Las Vegas market, is being very well-received. This should provide a stimulus for slot machine replacement demand to be accelerated, meaning of the 450,000 slot machines in the U.S., we may see those machines replaced more quickly as casinos move to adopt this cashless technology."

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