Casinos Run the Table

Casino stocks have been on a roll, and some investors are betting on continued strong growth in Las Vegas and gains from industry expansion as far afield as China.

But despite the lofty levels, some on Wall Street still think there's room for more gains. Notably, Merrill Lynch's David Anders, who lifted his price targets on shares of Harrah's Entertainment ( HET) to $83 from $72 and MGM Mirage ( MGG) to $80 from $65.

Those price targets would imply enterprise value-to-EBITDA -- or earnings before interest, taxes, amortization and depreciation -- multiples of 8.6 times for Harrah's and 10.6 times for MGM Mirage, at the high end of historic valuation ranges, wrote Anders in a research note.

Nonetheless, the analyst believes such valuations are warranted. In Harrah's case, the company will enjoy synergies and increased cash flow from its pending acquisition of Caesars Entertainment ( CZR), as well as long-term growth opportunities in Pennsylvania, the U.K. and Singapore. MGM Mirage, which is in the process of acquiring Mandalay Resort Group ( MBG), has "meaningful" growth opportunities in Las Vegas and the U.K., among other places.

Shares of both MGM Mirage and Harrah's established new 52-week highs Friday, with MGM Mirage hitting $69.49 and Harrah's rising as high as $64.90, capping off a week of casino stock buying that lifted the Dow Jones U.S. Gambling Index more than 2% last week. Another big casino stock, casino tycoon Steve Wynn's Wynn Resorts ( WYNN), gained about 7% over the week.

A new entrant's dazzling debut helped buoy the sector. Las Vegas Sands Corp. ( LVS) shares soared to almost $50 after the company priced its initial public offering at $29 a share. The IPO price was well above the revised $24-to-$26 target and an earlier range of $20 to $22 a share.

The Sands IPO likely sparked interest in other big casino names, according to Matt Quinn, senior lodging and gaming analyst at Zack's Investment Research. The company's casino in the Chinese enclave of Macao highlighted broader investor optimism about casino opportunities across the Pacific, Quinn said. (Zack's neither does nor seeks to do business with companies it covers, and Quinn owns no shares of companies he covers.)

"People are starting to realize there's strong growth potential in Macao," he said. "Casino companies can benefit from building there. They get a chance to build their brands in Asian markets and hopefully get Asian customers to come over to the U.S."

In a filing with the Securities and Exchange Commission, Sands said net income from its Macao casino, which opened in May, was $60.7 million during the third quarter. The company also plans to build a Venetian-branded resort in Macao by 2008.

MGM Mirage and Wynn also have plans for Macao casinos, and Merrill Lynch's Anders cited MGM Mirage's long-term prospects in Macao as a factor behind his price target upgrade.

Although Quinn is also bullish on the future of Las Vegas and Macao gaming, he's more cautious on the potential for robust casino stock gains in the near term. "I don't see a lot of upside for them at this point," he said. "They looked pretty reasonably valued." Quinn has holds on all the stocks he covers in the large-cap gaming sector, including MGM Mirage, Caesars, Harrah's and Mandalay.

The stocks are likely to trade sideways for the next three to six months, but MGM Mirage and Harrah's could see additional upside after that, as benefits from their big mergers begin to appear, Quinn added.

Despite the huge gains in Las Vegas Sands since its IPO, Quinn contends its multiple is not out of whack with the market. At recent levels, the company's enterprise value-to-EBITDA multiple is about 9, which is comparable to Aztar Corp. ( AZR) and Boyd Gaming ( BYD), both of which have Vegas properties similar to Sands.

As originally published, this story contained an error. Please see Corrections and Clarifications

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