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) 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) and Boyd Gaming ( BYD), 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."

Nevertheless, there are risks on Harrah's horizon, Curtis cautioned. "If economic trends significantly underperform expectations, consumers could be inclined to spend less on discretionary items, including casino wagering, which leads to underperformance at Harrah's properties," he wrote. "Likewise shares could be hampered by merger integration issues with Caesars and/or Horseshoe and a slowdown in gaming activity in key markets such as Las Vegas and Atlantic City."

In July, Harrah's completed its acquisition of Horseshoe Gaming Holding Corp., obtaining properties in Hammond, Ind.; Bossier City, La.; and Tunica, Miss.

Like Harrah's, MGM Mirage weighed in with a record third-quarter profit. MGM Mirage said net income was $126.9 million, or 89 cents a share, up from $47.2 million, or 31 cents a share, a year ago, including the results of discontinued operations. Still, it only matched Wall Street's 57-cent consensus for adjusted EPS, and it lowered its fourth-quarter outlook for adjusted EPS to 35 cents to 45 cents.

MGM Mirage's shares have traded over the past few months between $40.00 and the 52-week high of $55.30 hit yesterday.

J.P. Morgan's Curtis believes the stock could hit $72.00 over the next year-and-a-half, based on the earnings power of the combination of MGM Mirage and Mandalay Resort. He is advising investors to buy MGM Mirage shares on any pullbacks.

Others, however, are more cautious on MGM Mirage.

With his $57 price target, Merrill Lynch analyst David Anders believes there's much less room for the stock to appreciate. (Merrill Lynch does business and seeks to do business with the companies covered in its research reports.)

Anders lowered his 2004 full-year earnings estimate to $2.42 a share from $2.47 a share, after MGM Mirage guided expectations lower. But he noted that the company's expectations for lower fourth-quarter earnings are based primarily on increasing interest expense as the company is adjusting its borrowing to prepare for expansion. The analyst is leaving his 2005 estimate for adjusted earnings of $2.70 unchanged.

Meanwhile, Michael Rietbrock at Citigroup Smith Barney, reiterated his $45 price target on the stock on Wednesday. "Overall, both the third quarter and forward outlook were disappointing -- particularly in light of what have recently become high expectations," he wrote in a research note. (Citigroup Smith Barney does and seeks to do business with companies covered in its reports.)

Rietbrock wrote that MGG attributed 7 cents of third-quarter earnings per share to unusually high levels of collections of casino receivables, which the analyst does not consider to be recurring earnings.

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