AGEM Index

Reported earnings for the third quarter wrapped up during the month of November with the Dow Jones Industrial Average continuing its surge above 10,000 points and leaving some bears with global gaming suppliers. While movement in gaming supplier stock prices was modest during the past month, year‐over‐year comparisons demonstrated strength. The AGEM Index dropped 1.16 points, or 1.1 percent, during November, closing the month at 104.73. The index remains in better health than earlier in the year, as it has rebounded 46.8 percent over the last 12 months. Additionally, the majority of the index members reported positive gains during the month, but a few declines from the larger market‐capitalized members pressured aggregate valuations by month‐end.

Selected positive contributors to the index during the month include: (1) International Game Technology (IGT) with the only full‐point contribution, adding 1.77 points to the index based on a 5.89 percent increase in its stock price; (2) Bally Technologies (BYI) contributing 0.66 points with a 5.43 percent increase in its stock performance; and (3) Global Cash Access (GCA) posting a 17.54 percent increase in its stock price, adding 0.49 points to the overall index.

Selected negative contributors to the index include: (1) Konami (KNM) with its stock price dropping 10.95 percent, contributing ‐1.30 points to the index; (2) Aristocrat Technologies (ATI) posting ‐1.11 points to the index with a 10.84 percent decline in its stock valuation; and (3) Lottomatica (LTO) contributing ‐1.09 points to the index as its stock performance declined 8.13 percent.

As year‐end approaches and the economy outside of Wall Street begins healing, investors may remain cautious on gaming suppliers, as a sustained upswing in consumer spending will be required before material capital improvements emerge.

Analysis by Union Gaming Group
Broader indices continued to push higher in November despite mixed economic consumption data. Consensus trades continue to work, such as gold, crude oil and betting against a weak dollar. Against that backdrop, the AGEM Index was relatively flat during the month, largely mirroring news flow and sentiment throughout the gaming and related sectors. Importantly, the Global Gaming Expo (G2E)—the suppliers’ major gaming show every year—took place during the month with better than anticipated delegate turnout. While products across the show floor were compelling, technological advances were largely understood by gaming investors going into the show, so sentiment about the publicly traded gaming suppliers was unchanged following the event. There was also no incremental evidence that casinos’ capital expenditure budgets were loosening enough to foster the beginning of an important replacement cycle—despite evident advancements in server-based gaming (SBG).

On the positive event front, Ohio finally passed casino gaming in its four largest cities via voter referendum, raising questions about the ultimate outcome of a delayed referendum in the state for slots at racetracks. We suspect, however, that Kentucky has never had greater propensity than now to expand gaming in some format given the geographically contiguous nature of the two states. Major gaming markets such as Macau and Las Vegas experienced relatively positive events during the month, helping investor sentiment on the overall gaming sector. For Macau, material revenue growth continued, while Las Vegas reported lagging September data finally underscoring visitation growth and declines in unemployment, while our own analysis showed Las Vegas locals market stabilization during the period. Other highlights included Harrah’s Entertainment positioning to acquire Planet Hollywood in Las Vegas, signaling an important trough in cash flow and valuation for some investors in the sector, while the federal government delayed the enforcement of online gaming rules in the U.S., perhaps foreshadowing the ultimate passage of favorable Internet gaming regulation. Positive sentiment was offset to a large degree by Dubai World’s potential default as investors tried to connect the dots to MGM MIRAGE’s CityCenter risk during the period, which we are less concerned about.

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