U.S. Casino Profits Seen Strong Despite Stock Drop

LOS ANGELES – U.S. casino operators are likely to post robust quarterly earnings despite Gulf Coast hurricane damage and concerns over flagging consumer demand that have pressured the companies' stocks.

Investors are also concerned about the industry's outlook because high gasoline prices and rising interest rates have cut into disposable income consumers could use to gamble.

But the big companies have their core operations far from the hurricanes' devastation, and tourism data suggest that the gambling centers of Las Vegas (search) and Atlantic City (search) may be doing better despite weak consumer confidence.

"The third-quarter could be a positive catalyst. Most of the bad news is already priced in," said Brian McGill, an analyst at Susquehanna Financial.

"Casinos faced strong 'head winds"', he said, adding that the pace of growth in Las Vegas could slow, but "the outlook for Vegas is still pretty strong."

Shares of Harrah's Entertainment Inc. (HET), the world's largest gambling company, have fallen about 24 percent since early August, while shares of No. 2 casino operator MGM Mirage (MGG)are down 17 percent since late July.

Harrah's now trades at "a more realistic multiple" of around 7 times estimated 2006 earnings before interest, tax, depreciation and amortization (EBITDA), down from about 9 two months ago, McGill said.

Third quarter adjusted earnings per share at MGM, which acquired Mandalay Resorts in April and relies on Las Vegas for about 85 percent of its profit, are expected to rise about 47 percent, according to Reuters Estimates.

Profit at Harrah's, which acquired Caesars Entertainment in June, is expected to slip about 0.5 percent due to hurricane-related costs. About 15 percent of Harrah's EBITDA (earnings before interest, tax, depreciation and amortization) has come from destroyed or damaged properties in Louisiana and Mississippi.

Harrah's has said it expects insurance to cover the bulk of its losses, but it does not expect reimbursement before 2006.

At least one company is battling insurers over hurricane settlements, the extent of damage, and how to account for the disasters, creating confusion for many investors. In that light, any major earnings surprise would likely be met with "an extremely disproportionate stock price reaction," Daniel Davila, an analyst at Sterne Agee, said in a report.

Jefferies & Co. analyst Larry Klatzkin expects MGM to record $15 million in expenses in the third quarter for insurance deductibles, nonreimbursable costs and charitable donations related to Hurricane Katrina.

He also lowered future earnings estimates at Beau Rivage, MGM's Biloxi, Mississippi resort, to reflect only expected business interruption insurance and eliminated all forecast growth at the property.

The earnings outlook for companies like Isle of Casino Inc. (ISLE) and Pinnacle Entertainment Inc. , which rely on the U.S. Gulf Coast for a bigger share of their business, will also be affected by the prospects for insurance recovery and rebuilding, analysts said.

As quarterly earnings announcements take shape over the next few weeks, investors will be looking for clues to future growth in major gaming centers like Las Vegas, Atlantic City and Macau.

The state of Nevada said Tuesday August statewide gambling revenue rose 9.3 percent from a year earlier, but those numbers are already six weeks old.

Atlantic City this week reported a 5 percent rise in gambling revenue for the month of September, while Missouri's rose 2.5 percent and Iowa reported a 2.1 percent increase.

"Those numbers have been good, but I wouldn't categorize them as great," McGill said.

He also said traffic data from the South Jersey Transportation Authority showed that toll road visits into gambling hub Atlantic City fell 8.1 percent in September.

Marc Falcone, an analyst with Deutsche Bank, noted that auto traffic into Las Vegas from California was up nearly a percentage point in August, indicating that gas prices are not affecting drive-in visitors.

There has also been talk of growing softness in Las Vegas room rates, but Falcone said those concerns were overblown.

"The room rate trend has improved. Most of the discrepancy was due to shifts in Jewish holidays and the convention calendar," the analyst said.