Hitting The Gaming Jackpot Stocks of casino operators have been on a winning streak this year. Is it too late to get in on the action?
By Eryn Brown

(FORTUNE Magazine) – If you're like a lot of investors these days, you've probably harbored a bitter thought or two about all the other things you might as well have done with your money. Like stuffing it in a mattress. Or buying gold ingots. Or letting it ride in Las Vegas. And you've probably consoled yourself with reminders that such strategies are, by and large, foolish.

The funny thing is, you actually would have been better off in Vegas--investing in gaming stocks, that is. While the S&P 500 has plummeted 27% this year, leading casino operators like Mandalay (up 63%), Harrah's (up 29%), and MGM Mirage (up 28%) have been cashing in.

The reason for this hot streak is simple: Business is booming. Deutsche Bank analyst Marc Falcone estimates that Americans spent about $47 billion on casino gambling in 2001, up from $11.5 billion in 1991. Much of that increase is due to sheer availability. Once upon a time, you'd have to make a big trip to Atlantic City or Las Vegas to sit at the blackjack table. Now you can find licensed casinos in 11 states.

The business cycle has helped too. "When times are bad, people still smoke, drink, and gamble," says Thomas Weisel analyst Jake Fuller. Casinos also appeal to investors in down markets because they generate a great deal of cash. "Gaming produces the highest free cash flows of any industry," says Jason Ader, an analyst at Bear Stearns. Plus, you're not likely to find Enron-style accounting shenanigans going on at casino companies. They're too tightly regulated to get away with any funny stuff.

So is there still time to get in on the winnings? With share prices nearing analysts' targets across the board, we advise sitting out a couple of hands to wait for a dip. Once it comes, here are three good bets.

The biggest casino operator in the world is also the best. With properties like the Bellagio, MGM Mirage (MGG, $37), has the premium gaming facilities in Vegas, according to Bear Stearns' Ader. After its run-up this year, it also has a premium trailing P/E of 26. But MGM will add to its riches in 2003 with the opening of the long-awaited $1 billion Borgata casino complex in Atlantic City. The Borgata should give an even greater boost to MGM's partner in the venture, Boyd Gaming (BYD, $19). Its shares have rocketed up 186% this year. But it still trades at a reasonable valuation (2003 P/E of 15) when you factor in its growth. Thomas Weisel's Fuller projects the Borgata will boost Boyd's earnings per share from $1.08 this year to $1.52 in 2004.

Finally, one way to parlay a bet on the sector is to buy International Game Technology (IGT, $70). With 70% of the market, IGT dominates the slot machine business. It has hot games, like "Wheel of Fortune," and generates recurring revenue by leasing rather than selling its most popular names to get a cut of all those coins deposited. Even nearing its 52-week high, IGT only trades at 18 times 2003 earnings projections. And if recent history's a guide, the one sure bet is that people are going to continue to bet. Something to think about next time that brokerage statement comes in the mail.