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Gaming Stocks Hurt, But Long-Term Bets Could Pay For Some Funds

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Is now the time for investors to bet on gaming and casino stocks?

Analysts and money managers have a lukewarm outlook for these industries in the near term, and their lack of enthusiasm is only partly due to the devastation wrought by Hurricane Katrina, which destroyed or badly damaged a number of gambling properties in the Gulf of Mexico.

Looking out a few years, however, observers think the businesses have the potential to thrive, even in parts of Louisiana and Mississippi that were ravaged by the storm.

Standard & Poor’s had a “neutral” opinion of the gaming industry before Katrina hit, and that has not changed. These stocks had appeared and still seem to be “adequately priced,” said Thomas Graves, an Standard & Poor’s analyst who follows casino and lodging companies.

Joseph Fath, a gaming and lodging analyst with T.Rowe Price Group (TROW), a mutual fund and investment management firm, said he would view casino stocks with caution over the next 12 months. Fath thinks financial results for companies with operations in the Gulf States could become “very messy” over the next couple of quarters as they make “pro forma adjustments” tied to storm damage.

Still, gaming and casino companies with little or no exposure to Katrina should do well in the long run if consumers continue spending, Fath said. “When you look at the fundamental data and break it down, there really hasn’t been an impact on demand yet,” he said.

Industry observers said that, at most, 5% of the gaming and casino industries’ revenues and profits are generated from facilities in the Gulf States, so Katrina’s effect should not be significant.

Two of the biggest players in the gaming and casino businesses, Harrah`s Entertainment (HET) and MGM Mirage (MGM), have a handful of properties in areas affected by the hurricane, but the majority of their facilities are located outside the region. Stocks of both companies are currently ranked 3 Stars by Standard & Poor’s.

Fath and Graves noted, too, that companies hurt by the hurricane will be able to recoup some of their losses from property and business interruption insurance.

Daniel Ahrens, who manages the Vice Fund (VICEX), was also optimistic about gambling companies’ long-term prospects. “I think gaming overall still has a lot of upside potential,” said Ahrens, whose $48-million fund had about 25% of its assets in gaming and casino stocks at the end of last month. The portfolio’s largest holdings then included International Game Technology (IGT), which makes slot machines.

Ahrens expects gaming and casino companies to benefit as an aging American population retires and spends more of its disposable income on leisure activities, like gambling. These businesses will also get a boost as more states turn to gambling activities as a source of taxable revenue, Ahrens said.

“I think gaming overall is still booming,” Ahrens said. “And I don’t think it’s a saturated market.”

Despite the damage to casinos in the Gulf Coast, some casino owners have said they are considering rebuilding bigger and better facilities.

Because of the threats hurricanes pose, industry observers expect companies to lobby to build on land. (Currently, state laws in Mississippi and elsewhere require casinos to be located on water.) Building on solid ground would also afford companies a wider choice of locations, observers said.

Gamblers and tourists will return to the Gulf of Mexico, too, but it may be several years before the gaming and casino industries in the region begin doing as much business as they did before Katrina blew through the region, observers said.

“I think its going to be a slow process,” said Graves.


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