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Analyst Sees Slog For U.S. Online Gaming Legislation

John Seward

California and Pennsylvania won't pass legislation permitting online poker games until 2016, with a market roll-out likely there during the following year, an analyst said Monday.

Morgan Stanley's Thomas Allen cut his 2020 forecast on the U.S. online gambling industry to $2.7 billion, from $5 billion, citing slow movement and uncertainty on the legislative front.

Despite a slow pace, Allen believes a major industry will inevitably develop. "The larger states will serve as a tipping point," Allen said.

Both California and the Keystone state had made noises about passing bills this year. But it's looking unlikely.

"Lawmakers are unconvinced that online gaming is worth the hassle for limited tax revenue," Allen said.

Nevada, Delaware and New Jersey have already legalized online gambling. Yet the $135 million in total 2014 revenue from regulated U.S. online gaming came in well below Allen's previous forecast of $678 million.

And the nascent industry has some powerful foes, including Sheldon Adelson, the 81-year-old CEO of Las Vegas Sands Corp. (NYSE: LVS) last year reportedly launched a $300,000 campaign to prevent Internet gambling in California.

California and Pennsylvanian's predicted legalization will be followed with similar legislative action in 2017 by New York and Illinois, in Allen's view.

But given uncertainty surrounding the field, and its early stage characteristics, "investors are baking in very little value for online gaming" in casino stocks, Allen said.

The analyst cut his target on Boyd Gaming Corporation (NYSE: BYD) by 6 percent to $14, citing a lower outlook for the online sector.

Allen left his targets unchanged on Penn National Gaming, Inc. (NASDAQ: PENN) and MGM Resorts International (NYSE: MGM), saying neither play a significant role on line.

Latest Ratings for BYD

Date Firm Action From To
Mar 2015 Union Gaming Research Initiates Coverage on Buy
Feb 2015 JP Morgan Maintains Neutral
Feb 2015 Deutsche Bank Maintains Hold

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