Gaming Industry: Big Six to Post New High

The "Big Six" gaming operators ended 2005 with record-breaking profits nearly double the previous year's, thanks to surging demand for Las Vegas vacations and the two biggest mergers in industry history, analysts said this week.

With gaming companies set to begin reporting fourth-quarter and yearly earnings next week, analysts are predicting that the combined net income for the six largest Nevada-based gaming companies will have surged in 2005 to $1.7 billion, up 92.3 percent from $884 million in 2004.

The Big Six gaming companies are MGM Mirage, Harrah's Entertainment, Las Vegas Sands, Wynn Resorts, Boyd Gaming Corp. and Station Casinos.

Deutsche Bank analyst Marc Falcone said several factors combined to drive the sector's record performance: soaring convention business, the two largest gaming mergers in history, the opening of Wynn Las Vegas and the acceleration of gaming in Macau.

"Las Vegas is one of the top destination getaways in North America and a great value compared with the alternatives such as Disney World, New York City and San Francisco," Falcone said.

And though independent travel visitation may have slipped below expectations, the growth in the city's convention business continues to confound experts, he said.

Brian Gordon, a partner in Las Vegas-based financial consultant Applied Analysis, said 2005 was a banner year for the gaming industry, even compared with the previous year's above-average growth.

Wynn Las Vegas, which opened April 28, garnered national attention and lured new visitors to Las Vegas, he said.

Plus, the marketing and branding efforts for Las Vegas as a destination, the resurgence in consumer confidence and the drop in fuel prices toward the end of the year all increased consumer demand for the city as a tourist destination.

"These factors, combined with new product, have expanded the market, especially combined with the convention business, which has been expanding through the roof," Gordon said.

The gaming industry also managed to avoid a much-anticipated body blow when insurance policies covered most of the costs of lost revenues and rebuilding after hurricanes devastated the Gulf Coast gaming industry, he said.

Analysts expect the Big Six companies to report that annual cash flow -- or earnings before interest, depreciation, taxes and amortization -- increased 65.3 percent to $5.9 billion and that total revenues increased 51.2 percent to $19.2 billion.

For the 2005 fourth quarter, combined net income increased to $379.6 million, up 67.2 percent from $227 million in 2004, analysts said.

The companies are expected to report that cash flow increased 59.6 percent to $1.5 billion in the fourth quarter and that total revenues increased 52 percent to $5.2 billion, analysts said.

Interpreting the data was complicated by last year's mergers of Harrah's with Caesars Entertainment and MGM Mirage with Mandalay Resort Group. The picture was further complicated by divestitures both companies made to comply with antitrust regulations governing the mergers.

Gordon said the group as a whole, and MGM Mirage and Harrah's in particular, also improved performance through efficiencies made possible by the mergers.

Falcone, however, cautioned that although MGM Mirage started enjoying efficiencies in the fourth quarter that should continue through 2006, Harrah's has yet to produce synergies from its buyout of Caesars.

The consolidations also changed the makeup of the Big Six, bringing in Las Vegas Sands, owner of The Venetian, and Wynn Resorts, owner of Wynn Las Vegas, for the first time. They replaced Mandalay Resort and Caesars.

Penn National, a major gaming company not based in Las Vegas, also enjoyed substantial growth, with 2005 net income of $128.4 million, up 48.1 percent from $86.7 million in 2004, analysts said. They expect the company to report net income of $36.9 million for the fourth quarter, up 79.6 percent from $20.6 million in the 2004 fourth quarter.

University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, uses Penn National, which owns casinos and racetrack slot operations in several states, to illustrate the point that growth in gaming is not limited to Las Vegas. He notes that companies are eyeing possible gaming ventures in Pennsylvania, Kansas City and elsewhere around the country.

Internationally, Thompson also sees significant gaming growth in Singapore, Macau, England, Slovenia and Spain.

"Expansion is pulsating here, there and everywhere," he said, warning that Las Vegas has never experienced a "casino bust" but that it could.

"Maybe we should plan for 20 years out when the younger baby boomers will be 70 years plus and no longer want to do Vegas," he said.