Analysts differ in evaluating Harrah’s Enter. Shares

Oct 23, 2001 6:43 AM

If beauty is truly in the eyes of the beholder, then the value of a gaming company is determined by the way an analyst views the company’s balance sheet.

Case in point is Harrah’s Entertainment Inc. (HET) which has received a “strong buy” recommendation by Bill Schmitt, chief gaming analyst for CIBC World Markets, and a “hold” rating from Robin Farley, top gaming analyst for UBS Warburg.

Schmitt was impressed with Harrah’s recently announced third quarter results. Harrah’s reported earnings per share of $0.67, an increase of three cents over last year’s $0.64. He said that net revenue was better than expected, primarily because of solid gains from the company’s Central Region properties, as well as the recent acquisition of Harveys Gaming.

“With our apologies to Mel Brooks,” Schmitt wrote recently, “ we will co-opt his line from History of the World”¦”˜It’s good to be (the diversification) king.’ ”

Harrah’s is the most diversified of all casino operators, with 25 casinos operating throughout the United States, Schmitt wrote.

Farley saw things a bit differently.

“Aside from the benefit of the Harveys acquisition,” she wrote, “loss addbacks and a gain in other income, Harrah’s same-store properties had an earnings per share decline of roughly $0.07 from the prior-year period, even though central properties recovered to regular business levels post 9/11.”

Also, property EBITDA (earnings before interest, taxes, depreciation and amortization) declined 3.0% excluding the Harveys properties and $13 million of charges at the Rio. While management quantified “same store” cash flow growth as declining 3%, Farley said, “we calculate same-store cash flow growth without including new-unit investment in the definition of same-store. Therefore, same-store growth was really down 4-6%.”

Farley said her price target was $30 per share, “discounted back to $26-27.”

Schmitt’s target price was $37 per share.

Lakes Gaming

Earnings per share for Lakes Gaming Inc. (LACO), the company that emerged from the sale of Grand Casinos Inc. to Park Place Entertainment Corp. (PPE), fell in the third quarter ended Sept. 30 from last year’s $0.47 to this year’s $0.39.

Lyle Berman, chairman and CEO, said the decline resulted from smaller fees related to the management of Grand Casino Coushatta that is being negatively impacted by road construction both north and south of the property.

It was also noted that the company’s contract to run the Indian-owned casino expires on Jan. 16, 2002, but that the company has casino development and management contracts with four other Indian Tribes. These are in California, Michigan and on the east coast.

Fewer visitors

A drop of 14.1% in Las Vegas visitor volume during the month of September was reported by the Las Vegas Convention and Visitors Authority (LVCVA).

The monthly report indicated that 2,531,607 visitors were recorded in Las Vegas compared to last year’s 2,947,775.

 Similar declines were reported in occupancy levels at Las Vegas hotels while total room nights occupied declined by 14.9%.

More dramatic was the reduction in the number of passengers counted at McCarran Airport. The total was 2,124,864, down 28.3% from the 2,965,021 noted in last year’s count for the month of September.

Helping to offset the few visitors was the number of cars counted at the Yermo Inspection Station in Yermo, Cal. Total number of cars counted was 493,249, a 5.5% increase over last year’s 467,482.

Aztar Corporation

The third quarter of the fiscal year produced record results for Aztar Corporation (AZR).

These included: An increase in operating cash flow from $51.9 million to $54.5 million; an increase in operating income from $33.8 million to $37.3 million; a jump in net income from $14.6 million to $17.8 million, and an EPS of $0.46 that topped last year’s $0.34.

“During our third quarter,” said Paul Rubeli, chairman, president and CEO, “we attained the highest level of operating cash flow in our company’s history.” The cash flow margin was 25% compared to 23.3% in the comparable quarter.

Anchor Gaming

Anchor Gaming (SLOT) also reported record operating results for its fiscal quarter ended on Sept. 30.

Revenues and joint venture earnings, after adjusting for the sale of Sunland Park Racetrack and Casino, increased 12% to a record $142 million. And EBITDA increased 38% to a record $69 million.

Diluted earnings per share increased 137% to a record $1.85. Last year, earnings per share were $0.78.

The company said royalties from its joint venture with International Game Technology (IGT) amounted to $40 million, an 18% increase over last year’s $34 million.

The Insider

Four gaming companies have announced that they will report their quarterly results with conference and Webcasts. They are: Argosy Gaming (AGY) Wednesday, Oct. 24 at 7:30 a.m. (PT); WMS Industries Inc. (WMS), Thursday, Oct. 25, at l:30 p.m. (PT); Ameristar Casinos Inc. (ASCA), Monday, Oct. 29 at 8 a.m. (PT), and MGM MIRAGE Inc. (MGG) Tuesday, Oct. 30, at 8 a.m. (PT).

Pinnacle Entertainment Inc. (PNK) has been granted the 15th and last riverboat casino license by the state of Louisiana. The company plans to build a $200 million casino on a 175-acre site at Lake Charles.

Standard & Poor’s has slashed the bond ratings on 42 major companies including both hotel and casino companies. Described as “fallen angels,” the companies whose debt ratings have fallen into the so-called “junk” status include MGM MIRAGE Inc. (MGG), Park Place Entertainment Corp. (PPE), Hilton Hotels Corp. (HLT), and Starwood Resorts and Hotels Worldwide Inc. (HOT).

Shuffle Master Inc. (SHFL) has been named one of America’s 200 Best Small Companies by Forbes magazine. This was the third consecutive year that the Las Vegas-based gaming company has made the list. On the current list, Shuffle Master is listed in the 32nd spot.

Regulators in both Nevada and Colorado have endorsed the purchase of Fitzgeralds casino properties by Detroit entrepreneur Don Barden. Expected to follow suit are the regulators in Mississippi. Barden currently operates the riverboat Majestic Star in Gary, Indiana.

The Italian government is expected to make an imminent decision to privatize the country’s instant lottery business. In August, it was announced that the winning bidder for the project was a consortium involving Scientific Games Inc. (SGM) and Italy’s Lottomatica. However, the decision was challenged by lottery giant GTECH Holdings (GTK).

Advanced Casino Systems Corporation has been chosen by Boyd Gaming Corp. (BYD) to install its slot management system and casino management system in Boyd properties.

The Colorado Division of Gaming said the Sept. 11 attacks had no noticeable effect on casino revenues in that state. Officials said the state’s casinos won $59.7 million in September, an increase of 10% over last year.

Connecticut, once a hotbed of activity in the jai-alai business, will see its last remaining fronton close in December. The Milford facility will be shuttered following its final performance on Dec. 12. Once the home of three frontons, Connecticut saw the Hartford Jai-Alai close in 1995 while another facility in Bridgeport was converted to a dog track.

Argosy Gaming Company (AGY) has chosen Teradate, a division of NCR Corporation (NCR) to develop a database and customer relationship management solution for its facilities.

Churchill Downs Inc. (CHDN) has agreed to sell a 15% stake in Hoosier Park, Anderson, Ind., to Centaur Racing LLC. Following the sale, Churchill will own 62% of the facility and will continue as its manager.

Following a lengthy study, the Missouri Gaming Commission has concluded that the state’s $500 betting limit has resulted in Missouri casinos being less competitive with its nearby states. Also, it was felt that the lid did nothing to help problem gamblers.

Magna Entertainment Inc. (MEIC) has unveiled plans to build a small horse track in Dixon, Cal., to replace Bay Meadows, which it plans to close at the end of 2002.

Alliance Gaming Inc. (ALLY) has signed an agreement with Corp. (VGTI) to explore development of forward-looking interactive games with rich graphics and sound media resources.

The rich will become richer in Rhode Island if the Lottery Commission agrees to permit the installation of more slot machines at the state’s two pari-mutuel facilities. Lincoln Greyhound Park was to add 1,300 machines to its existing 1,700-machine track while Newport Grand Jai-Alai has asked for an additional 525 machines that would bring its total to 1,301.