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Valuations Hit Peak in Hotel, Gaming Stocks

LOS ANGELES (Reuters) - Hotel and gaming companies are valued at peak levels, but the stocks still have room to grow as they ride an industry recovery set to last several more years, a leading analyst said.

The stocks have exploded over the past two years, as Americans rediscovered the joys of traveling and gambling, but some are wondering if the best news is already factored in.

“Investors are trying to identify if the stocks fully reflect the recovery for the industry,” Deutsche Bank analyst Marc Falcone told the Reuters Hotels and Casinos Summit on Tuesday. “I think we have a good five to six years at least of strong recovery.

After a year of strong occupancy growth, Falcone said he now expects hotels to start focusing on price increases to drive profit over the next several years. The last industry recovery, he noted, lasted eight years, from 1993 to 2001.

Better profits, rather than higher multiples, will drive stock growth, Falcone said at the summit, held at Reuters offices in Los Angeles.

“We’re still at the peak end of the multiple range,” he said. “Lodging stocks are not going to appreciate on the basis of multiple expansion -- it’s going to be more earnings driven, potentially with real-estate asset transactions.”

BIG MULTIPLES

As lodging and gaming stocks have soared, they have stretched valuation multiples to new heights.

Both the Standard & Poor’s hotels index and the casinos index have doubled since March 2003, though they are now just off their peaks.

Well-known lodging stocks like Hilton Hotels Corp. and Starwood Hotels are now trading around 29 times estimated 2005 earnings, compared with a more down-to-earth 17 times for the Standard & Poor’s 500 Index .

Among gaming stocks, MGM Mirage, which is in the process of buying rival Mandalay Resort Group, is also trading about 29 times forward earnings.

Casino operator Harrahs Entertainment Inc., which is buying Caesars Entertainment Inc., is trading around 19 times expected 2005 earnings.

Industry analysts prefer to look at the EV/EBITDA multiple, essentially measuring the ratio of profitability to the overall value of the company.

By that measure, owner-operator hotel chains like Hilton and Starwood are valued at around 11 to 12 times, compared to a traditional range around 7 to 11 times, Falcone said.

Marriott International, trading around 23 times estimated earnings, is Falcone’s top stock pick for the hotel sector, which he says will benefit more as the industry recovery reaches its mid-to-late stages.

GAMING CATCHES UP

Gaming companies, previously the poor cousins in terms of stock valuations, have caught up, said Falcone.

“The argument of gaming valuations being too much of a discount to lodging valuations has played out since last summer,” he said. “The question now is, ‘Can gaming reset valuation levels above where they were historically?”’

Using the EV/EBITDA multiple, Falcone said, Las Vegas gaming companies traditionally might be valued at 7 to 9 times, but have since expanded. Casino operator Las Vegas Sands Corp., for example, is now valued at 18 times, he said.

But sustaining current gaming valuations depends on a continuation of strong fundamentals, a stable regulatory and tax environment, more consolidation or asset transactions, a growth in land values and recognition by investors of international growth in places such as Macau, Singapore and Britain.

News from the Reuters Hotels and Casinos Summit will be delivered throughout the day Wednesday and Thursday to Reuters terminals and to the Reuters.com Web site, reuters.com

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