Investors punish stumbling gaming firms

Aug 1, 2006 5:18 AM

Thursday went down as a black day for gaming companies, especially those whose second quarter earnings failed to measure up to analysts’ expectations.

Affected were the two "locals" giants in Las Vegas: Station Casinos Inc. (STN) and Boyd Gaming Corp. (BYD). Both suffered major declines in share value after reporting 2Q results that were less than what Wall Street expected. To some, however, the reports did not surprise.

A few days earlier, some gaming gurus were asking whether these two companies would "identify whether the Las Vegas casino market is slowing as much as recent reports suggest."

The answer came on Tuesday when Station Casinos Inc. reported that because of pre-opening expenses for its newly-opened Red Rock Hotel/Casino and a 119% jump in interest expenses the second quarter net income fell 34% to $26.8 million or $0.44 per share. Adjusted earnings were $37.3 million or $0.61 per share, below the consensus expectations of $0.63 per share.

The company reaffirmed its third quarter expectations for a profit of $0.49 to $0.54 per share and for the fourth quarter of between $0.59 and $0.64 per share. However, it lowered its full-year outlook for 2007 to $2.53 from the previous $2.95 per share.

Boyd Gaming followed by saying that its second quarter profit tumbled by 79% because of pre-opening expenses incurred at the newly-opened South Coast Hotel and Casino, located at the south end of Las Vegas Boulevard and write-downs related to the retirement of one of its original gaming river boats.

Net income dropped to $10.2 million or $0.11 per share compared to last year’s $48.6 million or $0.54 per share.

Also impacting the report was a share-based compensation charge of $6.3 million or $0.04 per share.

Adjusted earnings fell to $42.5 million or $0.47 per share from $50.3 million or $0.56 per share in 2005.

During the report, Boyd Gaming announced that Michael Gaughan, who joined the company when he sold his interests in Coast Casinos Inc. to Boyd Gaming, would leave his post and purchase the South Coast property. He plans to sell on the open market 15.8 million shares of BYD and use the proceeds to cover the purchase.

Opinions differed on just why Gaughan and Boyd Gaming decided to resolve the South Coast problems by selling the property.

Harrah’s Entertainment
Penn National

More bad news for the industry followed later in the week when Harrah’s Entertainment Inc. (HET) failed to meet the Wall Street consensus number and Penn National Gaming Inc. (PENN) said second quarter business was good but that company officials had reservations about next year.

Harrah’s Entertainment reported an increase in net income of 22% to $128.6 million or $0.69 per share. And, adjusted earnings per share from continuing operations rose 10.5% to $0.95 from $0.86 in last year’s second quarter. But, the analysts had expected earnings of $1.02.

Development expenses were blamed for the less than expected earnings. These expenses reached $18 million, up from $7 million last year. Among the projects being pursued are casinos in Rhode Island, Singapore, Spain, Slovenia and the Bahamas.

In the third quarter, the company expects to take a hit of between $0.04 and $0.06 per share because of the temporary shutdown of its properties in Atlantic City during the state’s budget impasse.

Penn National said second quarter net income rose to $42.7 million or $0.49 per share, even beating the Wall Street consensus by two cents per share.

Revenue jumped 82% to $537.8 million due to recent acquisitions, but even that number fell short of analysts’ expectations whose revenue number was $555.2 million.

Also causing concern among some investors was the announcement that the company’s president and COO Kevin DeSanctis, who guided the company through a major growth period that provided substantial benefits to investors, would be leaving at the end of the calendar year to start and operate his own company.

Nevada Gold

Multiple write-offs and increased legal expenses were cited as reasons for a loss in the fiscal fourth quarter of Nevada Gold and Casinos Inc. (UWN) that ended on April 30.

The company explained that the write-offs included $1.6 million in notes receivable related to two Native American gaming projects and $300,000 in project development costs at a Colorado casinos.

Thomas Winn, chairman and CEO explained, "After carefully evaluating every aspect of our business, we elected to take selective steps designed to enable us to focus on those opportunities most likely to enhance our operating performance over the long term.

"While our quarterly financial results were negatively impacted by these write-offs, we believe that we are now better position to execute our growth strategies and continue our transition to an operating business model."

Net revenues for the period increased to $3.2 million compared to $2 million in the fourth quarter of the comparable period due mainly to increased revenues that came from the Colorado Grande Casino in Cripple Creek.

Certain to impact future revenues, the company noted, was a 40% interest in the Tioga Downs Racetrack and Vernon Downs Racetrack in New York State. The company has a management contract for both facilities that are being converted into racinos with the installation of video lottery machines.