Weak earnings follow Trump

Feb 13, 2007 4:38 AM

Red ink continues to flow at Trump Entertainment Resorts Inc. (TRMP) but at least one analyst believes that the company’s shares, selling at $17.50 each, are undervalued.

"We believe Trump shares are 19% undervalued, as the current stock price reflects a below-average valuation in existing properties and limited value on land owned for future development," said Steven Kent, an analyst for the highly-regarded Goldman Sachs.

He initiated coverage of the company with a "buy" rating and issued his rating despite the fact that the company reported a loss of $9.7 million, or $0.31 per share, for the fourth quarter that ended on Dec. 31, 2006. This compared with the $10.3 million or $0.33 per share loss reported by the company in the comparable quarter of 2005.

Some analysts were encouraged that the fourth-quarter loss narrowed 56% on higher revenue. Revenue for the quarter climbed to $244.2 million, an increase of 4% from the $234.7 million in the previous year. Also, total operating costs edged downward by 1%.

But, even the improved results failed to match analysts’ consensus which expected the loss to be down to $0.24 per share.

For the full year 2006, the company’s loss was $18.5 million or $0.60 per share.

The company was expected to improve its performance after a major reorganization took place in March 2005.

Since, Nov. 13 of last year, however, the company’s share price has been in a decline, dropping more than 20%.

And there could be further problems for Trump’s three Atlantic City casinos because of competitive pressure from Pennsylvania that already has three racetrack casinos in operation and will have another three before the end of the calendar year. Also, business could be affected by a recent requirement that each casino set aside only 25% of floor space where smoking can take place.

Despite these problems, Kent believes, "This is a turnaround story where management’s near-term focus is on improving the profitability of existing properties, which have significantly lagged the market."

Penn National Gaming

Fears of a slower first quarter and full fiscal year 2007 caused the share price of Penn National Gaming Inc. (PENN) to be hit hard during the last two days of trading last week.

This despite a solid fourth quarter in fiscal 2006 that saw net income rise to $87.3 million from last year’s $37.6 million or $1.00 per diluted share compared to last year’s $0.44 per diluted share.

For the full year, the company reported earnings of $327.1 million, nearly three times the $120.9 million earnings in 2005. On a per share basis, this came to $3.78 per share. In 2005, the per share earnings were $1.41 each.

The figures reported for 2006 included such items as disposal of assets, interest expense, net income taxes, hurricane and goodwill impairment and various compensation charges.

But the share price impact came from management’s estimates for both the first quarter of fiscal 2007 and for the full year. For the quarter, the company said it expected earnings to be $0.46 per share, or far below the analysts’ estimate of $0.55 per share.

For the full year, the company estimated earnings to be $1.86 per share whereas Wall Street was looking for $2.13 per share.

The forecast caused the share price to drop $1.27 on Thursday and another $1.75 per share on Friday. At closing, the shares traded at $44.48 each.