Casino stocks have suffered the fate of the broader market over the last several weeks, falling about 5% as investors fretted the bull run was over. But with Wall Street continuing to boost earnings estimates on casino operators, their stocks may be worth a gamble.

On Tuesday, a number of Wall Street brokerages raised their earnings estimates on gambling companies, telling investors that fundamentals, especially with regard to room pricing, are stronger than expected. J.P. Morgan upped estimates on Mandalay Resort Group ( MBG) and Ameristar Casinos ( ASCA). Bank of America boosted estimates for Mandalay and MGM Mirage ( MGG), as did Merrill Lynch.

In a down market, the rising estimates are the latest in a string of bullish news. Standard & Poor's issued a rosy note on the gaming industry on Monday afternoon, telling bond investors that the industry is maturing and appears healthy. Two weeks ago , Caesars Entertainment ( CZR) started the trend, when it preannounced higher first-quarter results.

While many believe that an industry that had massive gains last year -- the Dow Casinos rose 61% in 2003 -- could be overvalued, the underlying trends for the casino industry are extremely strong. The point was hammered home in J.P. Morgan's Gaming & Lodging Conference last week, prompting analyst Harry Curtis to up his estimates on Tuesday.

Las Vegas results are impressive, driven in part by easy comparisons. But nickel-and-dime leisure travelers are being replaced by lucrative conventioneers, which has been driving big gains to revenue per available room, a key metric called RevPar. In the second week of April, a survey of room rates on the Las Vegas Strip showed the average room came in at $210, 67% higher than last year.

"The greater group demand is displacing our lower-rated tour and travel customers and carries an incremental value per room per night of over $100," said Curtis, noting this trend is what prompted his estimate boost. "For the first time in three years, operators in Las Vegas are showing meaningful expansion in earnings before interest, taxation, depreciation and amortization margins."

And it's not just casino operators. According to Curtis, gaming suppliers, such as International Game Technology ( IGT), that manufacture slot machines have visibility on earnings into 2005 as casinos upgrade outmoded slots and gaming continues to spread domestically.

"Near-term demand should be supported by the cashless replacement, which we expect to drive sales through early 2005," said Curtis. "Mid- to long-term demand fundamentals are also strong and should be driven by new and expanded gaming jurisdictions, including California, New York, Oklahoma and possibly Pennsylvania."

A recent Supreme Court ruling on Class II electronic bingo-style gaming will give all equipment suppliers a new and potentially lucrative market to tap. And with a number of international locales -- notably the U.K. and Macau -- adding new casinos or weighing legislation to spread them, suppliers and casino operators will see more business opportunities in 2005 and beyond.

Furthermore, short interest in large-cap casino names is high, which means that upside movement could be exaggerated as traders move to buy equity shares to cover their bets that stocks will fall. According to Bloomberg, from Feb. 15 to March 15, short interest in MGM Mirage rose by 30% while short interest in Caesars rose 20.5% -- at a time when short interest in the gaming operators group fell by 2.1%.

Short interest in select, smaller gambling companies is also rising, especially with regard to days to cover, which gauges the likely difficulty of covering short positions. Traditionally, anything over seven days could result in a short squeeze, and three gambling companies -- Station Casinos ( STN), Aztar ( AZR) and WMS Industries ( WMS) -- have more than 10 days to cover.

Of course, there's always the possibility that the shorts are correct, betting that casino operators are priced to deliver perfect first-quarter earnings and destined to disappoint the increasingly optimistic market. Under this scenario, companies that don't beat earnings targets by a wide enough margin would be punished for not beating Wall Street's whisper number.

But estimates for every casino company haven't risen in lock step. Over the last four weeks, 19 analysts have upped estimates for Caesars, with 20 upping their estimates on Mandalay. But estimates on Aztar, MGM Mirage and Harrah's ( HET) are relatively unchanged over the last four weeks, as are the share prices of all three.

Nobody Calls
Analysts have been boosting estimates for select casino operators, even as many shares fall.
Company Current 2004 EPS Est. Analyst Revisions to 2004 EPS Estimates* Share % Change*
Upward Downward Avg. Change
Alliance Gaming $1.06 1 1 $0.00 20.4%
Aztar 1.54 1 1 -0.02 0.00
Caesars Entertainment 0.60 19 0 0.06 11.1
GTech Holdings 2.73 1 1 0.00 -6.1
Harrah's Entertainment 3.06 0 0 0.00 0.2
Mandalay Resorts 2.97 20 1 0.29 5.5
MGM Mirage 1.88 4 0 0.01 0.3
Pinnacle Entertainment -0.06 0 0 0.00 -4.7
Scientific Games 0.82 2 2 0.04 2.8
Station Casinos 1.79 6 0 0.03 10.1
WMS Industries 0.13 0 1 0.00 -7.3
Wynn Resorts -0.58 1 2 -0.08 -3.4
*Over the last four weeks. Source: Bloomberg, Baseline, TSC Research

With Las Vegas RevPar up 18% in January, the Chinese New Year and the Super Bowl falling in February and the NCAA Tournament in March, there are a number of catalysts to drive first-quarter earnings. And with brokerages starting to boost estimates across the sector, some analysts believe that current expectations could go even higher -- taking shares with them.

"Already lofty expectations for Las Vegas Strip results in the first quarter, in general, may not be high enough," said Jay Cogan, analyst at Banc of America Securities. "March demand may prove even strong than expected, led by room rate upside during the NCAA college basketball championships."