Election outcome will likely boost sales for gambling firms

Wednesday, Nov. 6, 2002 | 11:11 a.m.

The election of pro-gambling governors in Pennsylvania and Maryland will likely create a windfall for slot machine manufacturers, though increased competition makes it difficult to poinpoint potential winners among casino operators, Wall Street analysts said today.

Pennsylvania's Democratic governor-elect Ed Rendell has endorsed adding slots at racetracks, riverboats and video poker bars, paving the way for significant competition with nearby Atlantic City casinos, analysts said.

In Maryland, Republican winner Robert Ehrlich aims to legalize slots at racetracks to support education, which could also pose some competition for the long-dominant Atlantic City market, they said.

In Kansas, Democrat Kathleen Sebelius has supported voters' right to choose whether to allow slots at racetracks, which could present modest competition for Harrah's Entertainment Inc.'s Harrah's Kansas City, Mo., casino and its contract to run a nearby tribal casino.

The results were expected given these states' deficits of hundreds of millions of dollars, analysts said.

"We continue to see gaming expand in these challenging economic times (in which) states are looking to generate additional sorts of revenues," Bear, Stearns & Co. gaming analyst Jason Ader said. "Gaming has been a highly successful model for increasing revenues in last 10 years."

Republican governors who haven't endorsed expanded gambling were elected in Connecticut, Nebraska, Ohio and Florida -- pinching plans to expand casinos in those states.

In Florida, the re-election of the President's brother Jeb Bush is particularly negative for gaming supporters, who have increasingly lobbied for slots at the state's numerous horse and dog tracks, Deutsche Bank Securities analyst Marc Falcone wrote in a research note.

Bush has not signed a gaming compact with the state's Indian tribes, which operate limited casinos, and has been an outspoken opponent of gambling.

With a budget deficit of nearly $4 billion, Ohio's Republican incumbent may have "no choice" but to consider new gaming legislation, which has already been endorsed by some members of the legislature, Merrill Lynch analyst David Anders wrote in a research note.

Penn National Gaming, which already operates racetracks in Pennsylvania and a "racino" in nearby West Virginia, may be in a position to benefit from further legalization, analysts said.

Las Vegas companies in Atlantic City will likely be somewhat affected by potential competition from Pennsylvania and Maryland, they added.

Park Place Entertainment Corp. will generate about 35 percent of its cash flows in 2003 from Atlantic City, while Harrah's Entertainment Inc. and Boyd Gaming Corp. will receive 23 percent and 12 percent, respectively, reported Lehman Brothers analyst Joyce Minor.

Other mitigating factors exist, however.

"Atlantic City has historically weathered new competition adequately with shorter term margin pressure," Minor wrote in a research note. Also, legalization and casino implementation "is a lengthy process that could take 2-4 years." And the potential for higher gaming taxes will somewhat offset the effects of broader legalization, she noted.