Boyd Gaming is biggest winner in banner year for casino stocks

By Liz Benston

Monday, Jan. 10, 2005 | 10:51 a.m.

Best known as the owner of the aging Stardust property, Boyd Gaming Corp. was long the stepchild of the largest casino operators on the Strip. Its stock moved little and its assets, six off-Strip casinos as well as riverboats in the Midwest and South, were somewhat overlooked by Wall Street.

But that was before the company began reaping gains from its Borgata resort in Atlantic City in 2003, bought Las Vegas casino giant Coast Casinos Inc. in July and became caught up in the greatest investor buzz for gaming stocks in recent memory. The company's stock rose 158 percent last year, the highest of the top Las Vegas casino giants.

"A lot of things went right," Boyd Gaming Corp. Chief Financial Officer Ellis Landau said.

While the increase had a lot to do with the Coast acquisition, other trends played a role, Landau said.

Mergers and individual property sales at high prices have led analysts to increase company earnings estimates and growth prospects, he said. Strip assets also are experiencing a hefty increase in estimates. The strength of the Strip helps the locals gambling market by boosting the local economy, he said.

"Most of these weren't foreseen at the beginning of the year," Landau said. "It's safe to say that perhaps none of us predicted that we'd end the year at $41.65."

Ten of the largest Nevada gaming companies, including slot maker International Game Technology of Reno, posted an average return of 67 percent last year. That compares with a 9 percent return for the Standard & Poor's 500 Index and a 3 percent return for the Dow Jones Industrial Average.

That 67 percent return also doesn't include Las Vegas Sands Corp., which rose 66 percent last month since its initial public offering Dec. 15 at $29 per share.

Excluding IGT and competitor Alliance Gaming Corp., the eight remaining casino stocks reported an average gain of 92 percent.

Applied Analysis, a Las Vegas economic forecasting firm, believes growth will slow this year.

The company's proprietary index of gaming stocks rose 40 percent last year and 37 percent the year before.

Applied Analysis Principal Brian Gordon said those growth rates aren't sustainable and predicts 2005 profit growth, emulating stock prices, in the mid-teens.

"We don't see this type of double-digit growth compounding on itself," Gordon said. While tourism demand for Las Vegas doesn't show signs of slowing down, there are concerns about income levels and consumers' ability to continue spending at the current pace, he said.

"There's double-digit growth in spending patterns but income levels aren't rising as quickly," he said. "Appreciating home values contributed to people's wealth, which is buoying the economy somewhat."

Eric Hausler, an analyst with Susquehanna Financial Group, said that casino stocks in general benefited from last year's megadeals and that this year investors will do more strategic stock picking.

"You're not going to have another 50 percent gain in the (gaming) group and it may not be all the names this year," he said.

Casino stocks are still on pace to outperform the financial markets this year, analysts say.

In a research report to investors Tuesday, Merrill Lynch analyst David Anders said investors will soon begin to give companies such as Harrah's Entertainment Inc. and MGM Mirage credit for the earnings growth the companies expect to achieve through their mergers. Merrill Lynch said Harrah's earnings are expected to grow by 14 percent this year and 19 percent for MGM Mirage.

Anders' report also addressed the industry's penchant for spending big chunks of cash on potentially risky investments. Investors have historically sold off casino stocks in cycles as operators go on a building binge and concerns about supply outstripping demand arise, he said.

The industry's recent acquisitions "will soak up excess cash flow over the next several years," preventing companies from pursuing low returning opportunities, Anders wrote. In addition, having three major Las Vegas companies pouring money into Macau, China, will limit the chance that they and their competitors "overbuild" in the United States, he said.

A combination of landmark deals helped push gaming stocks to new highs.

Boyd Gaming's merger with Coast, announced Feb. 9 and consummated July 1, was a well-timed move to strengthen the companies' presence in the lucrative locals gambling market, analysts said.

After the acquisition, Boyd revealed profit details from the privately held Coast that were better than expected and scored a hit with its half-owned Borgata megaresort in Atlantic City, which opened in 2003. The company has a number of growth prospects in the pipeline, including redeveloping the aging Stardust property on the Strip and its new South Coast hotel and casino to the far south of the Strip.

"It's hard to say how the market will value us in terms of where our company is growing but we think we are trying to invest in areas of strength," Landau said.

Other major companies benefited handsomely from their megadeals. MGM Mirage stock, up 93 percent over the past year, rose 58 percent from news of the company's initial bid to purchase Mandalay Resort Group through the end of the year. Mandalay Resort Group rose 17 percent over the same period.

Harrah's stock, after falling several dollars per share following news of its merger with Caesars Entertainment Inc., rose 29 percent from mid-July through the end of the year. Caesars stock jumped 45 percent over the same period.

Analysts at first questioned the wisdom of combining companies with such different cultures and assets. Many have since changed their tune, saying Harrah's plan to squeeze higher profits from Caesars' casinos using the Harrah's Total Rewards loyalty program makes sense.

Company executives also benefited handsomely from their hefty stock holdings, making 2004 a banner year for sales as well as eye-popping gains in net worth.

Las Vegas Sands Corp. Chief Executive Sheldon Adelson reaped the greatest windfall of all without selling any shares, boosting his net worth by about $14.8 billion last year when is 308.2 million shares rose 166 percent from their initial IPO price.

Coast Casinos Inc. Chief Executive Michael Gaughan received 14.9 million shares of Boyd Gaming stock when his private company was acquired by Boyd in February. Gaughan's 17.4 percent stake in Boyd, worth $286 million then, was worth about $621 million at year-end. According to a stockholder agreement, Gaughan, who runs Coast as a Boyd subsidiary, may not sell his shares without first offering to sell to Boyd Gaming or Chief Executive Bill Boyd.

Boyd transferred 209,896 shares between accounts but hasn't sold any shares since the company's inception. "He's never been a seller, always a buyer," Boyd spokesman Rob Stillwell said.

However, Boyd Gaming President Don Snyder, who will retire in March, sold 350,000 shares last year, reaping proceeds of about $11.8 million.

Proceeds from executive stock sales don't include the cost of buying stock options.

Wynn Resorts boss Steve Wynn's 24.5 million shares were up by about $1 billion last year for total holdings worth about $1.6 billion through year-end.

Caesars Entertainment boss Wally Barr also didn't sell shares, instead obtaining 80,000 shares of restricted stock. Those shares were worth about $1.6 million at year-end.

Of top executives, Station Casinos Inc. Chief Executive Frank Fertitta III sold the most shares last year. His sales of around 3.2 million shares last year were worth $138.5 million.

Station executives have sold shares as part of pre-announced stock sale plans for the past several years, Chief Financial Officer Glenn Christenson said. Fertitta's sales are periodic, made through an agent without control over timing, he said.

"I call it the Boy Scout way to do it," Christenson said. "Investors don't get blindsided. What they don't want to read when they get up in the morning is that there's been a significant amount of stock sold and they don't know about it."

MGM Mirage Chief Executive Terry Lanni sold 700,000 shares last year, reaping proceeds of about $33.4 million.

Mandalay Resort Group Chief Executive Mike Ensign sold 539,050 shares last year worth about $27.9 million. That was part of a massive liquidation of shares worth more than $100 million that began in 2003, though Ensign was replenished with a grant of 405,000 restricted shares last year.

Harrah's Entertainment Chief Executive Gary Loveman sold 164,062 shares last year worth about $9.5 million.