Casino stocks are near 52-week highs and research reveals that institutional investors are buying the highfliers as Wall Street analysts raise earnings estimates, saying the revenue recovery will only get stronger. But valuations are getting pricey, forcing investors to be a bit more selective about the group.

Bullishness on casino stocks, however, continues to be the prevailing mood. J.P. Morgan analyst Harry Curtis boosted his earnings estimates on Caesars Entertainment ( CZR) and MGM Mirage ( MGG) Thursday, telling investors that first-quarter results are ahead of expectations. In Curtis' view, Las Vegas results will drive gains in revenue per available room, a key lodging metric known as Revpar.

"Our revised estimate assumes 8% to 9% EBITDA growth in Las Vegas year over year vs. our previous expectations of 2% to 3% growth," said Curtis, noting that fourth-quarter Revpar grew by 7%. "Our call-in surveys suggest 15% rate growth in call-in rates, which we estimate will result in 10% to 11% Revpar growth."

And while Curtis didn't up his estimates for the fiscal year, he said that 2004 results could see some upside, with signs of exceptional Revpar growth seen in the second quarter as well. Based on current call-in surveys of room rates in April and May, Curtis said that Caesars could see Revpar grow by 1% to 2%, while MGM could see Revpar gains as well.

Any Revpar gains would drive earnings estimates higher for both casinos. Curtis estimates that a $3 to $4 hike in average room rates at Caesars would add a penny to earnings per share per quarter, while a $1 increase at MGM would add a penny to EPS.

The revenue recovery has not only lifted results at the largest casino operators, it's also enabled smaller, regional casinos to clean up their balance sheets. In the last few weeks, Argosy Gaming ( AGY), Ameristar Casinos ( ASCA) and Isle of Capri Casinos ( ISLE) have all refinanced their high price debt at lower rates, which is immediately accretive to earnings, and prompted Deutsche Bank to raise 2004 estimates and price targets.

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