Ante Up

It was not too long ago when gambling was considered a major vice, right up there with smoking and drinking. While the morality of such activity continues to be debated in some circles, there’s no question that gambling has become more acceptable in society, especially since Las Vegas turned into Disneyland and the World Series of Poker became a major event on ESPN. As a result, the gaming industry is thriving, and enjoys a Zacks Industry Rank of 2.85, according to Nick Raich’s “Weekly Earnings and Sector Update.” That places it 65th out of more than 200 industries.

“From our viewpoint, the increasing social acceptance for gaming nationally has helped increase its popularity and with the help of such things as poker, this trend should continue,” said 5-Star analyst Lawrence Klatzkin of Jefferies & Company.

That social acceptance has made a night out at the casino or riverboat just another form of entertainment, instead of an illicit act that raises eyebrows in the community. Chief among these aficionados are the baby boomers, which account for almost a third of this country’s annual income. This means that casino gambling reels in the richest segment of the U.S. population, and is also gaining steam with the younger crowd.

Despite its rapid growth, most people still relate gambling to Las Vegas. While its no surprise that the economic recovery has been a boon to the Strip, the gaming industry has substantial opportunities outside of Nevada. More and more state governments see gaming as a helpful hand when times get tough.

“The increasing need for tax dollars has made states more dependent than ever on gaming revenues,” said Klatzkin. In fact, the analysts points out that 15 states received substantial tax revenues from casino gambling, which is likely to increase in the future. There are also ample international opportunities in areas such as the UK, Macau, and Singapore, among others.

Given the potential on the domestic and international fronts, Klatzkin, along with many other analysts, believe that the gaming industry will continue to perform well as it becomes a more reliable business. “We see gaming stock multiples continuing to approach those of the hotel industry and expect that gaming stocks will continue their meteoric rise,” said Klatzkin.

While Klatzkin believes that the long-term growth potential of the U.S. gaming market is favorable, he still bases his recommendations on company-specific matters. A favorable environment is never enough when it comes to investing. In order to make intelligent moves over a long period of time, investors need to find which companies are in the best position to profit. For example, acquisitions have been, and will continue to be, a major contributor of this space’s success, and savvy investors are able to take advantage of that. Consulting the research of analysts are among the most useful ways to garner this information. With the help of these experts, investing in this thriving space may not be that much of a gamble.

What Do the All Stars Recommend?

Zacks tracks the analysts who cover the casinos industry and ranks them based on the performance of stocks recommended. Some of the top-ranked analysts include: T. Eilers of Roth Capital Partners, Inc.; D. Forst of McDonald Investments, Inc. A KeyCorp Company; L. Klatzkin of Jeffries & Company; and R. Petrik of Legg Mason Wood Walker, Inc. Get their recommendations and those for all others in the industry by clicking here .

Top Consensus Stocks

Below are the top stocks recommended by the most 5-Star analysts in the casinos industry.

Boyd Gaming Corporation (NYSE: BYD ) reported a robust fourth quarter performance earlier this month, which included revenue jumping +75% to $540 million thanks in large part to the addition of the Coast and Shreveport properties. Same-store revenues advanced +5.3%. Net income reached 45 cents per share, compared to 19 cents in the year-ago period. Wall Street was expecting about 37 cents, accounting for a positive surprise of almost +22%. “The Last Vegas locals market is firing on all cylinders with growing demand and limited supply growth, with our company’s excellent properties enjoying a significant share in that strong market,” said Chairman and CEO William S. Boyd. “And our ‘category-killer property’ in Atlantic City, Borgata, is truly a market leader and should continue to be for some time.” Boyd Gaming is currently working on ways to add upon these two thriving areas. The Borgata Hotel Casino and Spa, which is a joint venture, posted a fourth quarter gaming revenue rise of +35% and a non-gaming revenue increase of +6.2%. Also, Borgata reported the highest table game win in the Atlantic City market, garnering 21% of the table game market and beating the property in second place by +56%.

In a February 10th research report, Lawrence Klatzkin of Jefferies & Company stated, “It appears the company has taken off and is currently firing on all cylinders with strong performance out of all of its operating segments. We believe management has successfully taken this company to a new level and has made Boyd one of the strongest gaming companies in the industry.” Boyd believes its Las Vegas locals/Borgata combination can continue to build value for its shareholders. To further research Boyd Gaming Corporation, click BYD .

MGM MIRAGE (NYSE: MGG ) recently announced that the Nevada Gaming Commission unanimously approved its proposed merger with Mandalay Resort Group. MGM MIRAGE expects the transaction to be completed in the first quarter of 2005. The news came shortly after the Federal Trade Commission decided no further action would be required. The combined company would be the world’s leading gaming and leisure company with an unmatched portfolio of results, including the Bellagio, MGM Grand Las Vegas, The Mirage, Mandalay Bay and Circus Circus. MGM MIRAGE would also own the fifth largest convention center in the U.S.

As for its fourth quarter, MGM MIRAGE reported adjusted earnings per share of 51 cents, which was ahead of the consensus by almost +16%. Net revenue advanced +11% to $1.06 billion, while company-wide revenue per available room (REVPAR) advanced +12%. “The fourth quarter of 2004 provides an exclamation point on a tremendous year for all of us at MGM MIRAGE,” said Chairman and CEO Terry Lanni. “We have again proven our ability to operate the world’s best resorts, and have demonstrated vision to look to the future. In 2005, we will successfully integrate Mandalay Resort Group’s properties and employees, and begin executing on the vision of Project CityCenter.” To further research MGM MIRAGE, click MGG .

Penn National Gaming, Inc. (NASDAQ: PENN ) generated record fourth quarter operating results with its portfolio of regional gaming properties. Diluted earnings per share from continuing operations rose to 44 cents from 32 cents last year, and net revenues advanced to $276.7 million from $257.4 million. One of the highlights for the quarter was at Charles Town Races & Slots™, where EBITDA grew about +20% year-over-year without the effect of the insurance settlement and tax rebate. Continued capital investments led to the growth. The company has several plans for future expansion and financial growth, including the pending acquisition of Argosy Gaming Company, which Penn National Gaming expects to close in the second half of 2005. The combined company would be the third largest operator of gaming properties in the U.S. with annual revenue of more than $2 billion, over 20,000 slot machines, and about 700,000 square feet of casino space.

In a February 3rd research report, Marc Falcone of Deutsche Bank Securities said, “We think estimates will likely move up throughout 2005 given continued strong fundamentals, potential for positive legislative changes, substantial synergies, and a deep pipeline of growth opportunities that should also act as further catalysts.” To further research Penn National Gaming, click PENN .

Ameristar Casinos, Inc. (NASDAQ: ASCA ) said its 2004 performance extended its trend of growth in all key performance indicators for the third straight year. The company posted fourth quarter diluted earnings of 52 cents per share, compared to 35 cents in the year-earlier period. The result was more than +15% ahead of Wall Street expectations. Consolidated net revenues reached $214.7 million, or +8.9% above year-ago levels. All properties improved in net revenues during the quarter, including advances of +9.6% at Ameristar Kansas City, +8.4% at Ameristar Vicksburg, and +7.4% at Ameristar St. Charles. Ameristar Casinos said its success reflects the continuing implementation of its four key strategies in its business model, namely creating the best facility in each of its markets; further building the Ameristar brand; leading its markets in slot technology; and its hands-on management approach at the property and corporate levels. To further research Ameristar Casinos, Inc., click ASCA .

Read the full analyst report on ASCA

Read the full analyst report on MGM

Read the full analyst report on PENN

Read the full analyst report on BYD