What's in the Cards for Park Place?
By Eric Wahlgren
Growth for casino operators usually lies in building new, ever-snazzier resorts. Thus, Park Place Entertainment's (PPE ) decision to postpone construction of a $475 million hotel tower at Caesars Palace in Las Vegas could be perceived as something of a letdown for investors. Those in the know see something else.
The world's largest gaming company is expected to post $4.7 billion in revenues for 2001 -- impressive for a recessionary year, considering that's down only slightly from 2000's $4.9 billion. Its willingness to exercise fiscal prudence in the post-September 11 world is part of what makes the stock a good bet, say its loyal fans.
The company, they point out, will still proceed with a less-costly project at Caesars that also has the potential to be a big revenue-raiser: a 4,000-seat "Coliseum" concert venue, budgeted at $95 million, that's scheduled to debut in March, 2003, with Canadian pop diva Celine Dion.
SLOW YEAR AHEAD?
Shares of Park Place, the name behind Caesars and other resorts including Paris Las Vegas, Bally's, and the Las Vegas Hilton, have rebounded briskly since the terrorist attacks -- rising some 58%, to $10, from a post-September 11 closing low of $6.31. That's still about 22% below last year's high of $12.86, which the stock hit on June 4, but Standard & Poor's analyst Thomas Graves believes it could easily approach $12 in 6 to 12 months.
"I am not looking for 2002 to be a big growth year," says Graves, who has a five-star (buy) rating on Park Place. "We are still in recovery mode from September 11. But compared to other companies, the valuation is attractive."
Valuation is key when looking at this stock. Park Place trades at about 7.2 times projected 2002 EBITDA (earnings before interest, taxes, depreciation, and amortization) of $1.1 billion, Graves says. Analysts consider EBITDA a truer measure of actual gaming-company performance than net income, as the depreciation and amortization on the fixed assets of casinos can greatly affect income per share.
By way of comparison, Graves says, rivals MGM Mirage (MGG ) and Harrrah's Entertainment (HET ) each trade at more than nine times projected 2002 EBITDA. "If you look at it on a multiples basis, Park Place continues to trade at a discount to the group," says Bryan Maher, lodging-and-gaming analyst at Credit Lyonnais Securities in New York, who has a buy rating on the stock. "Yet it is the largest gaming company in the world and among the most diversified," he adds. "We definitely think it is one of the more attractive stocks in the group."
Another attraction: Analysts think Park Place has enough financial flexibility in 2002 to reduce debt, buy back shares, and even begin new construction, which can boost earnings-per-share figures. Graves is looking for the company to have about $1.15 per share of free cash flow, or cash available after expenses for maintaining existing properties. "This is one of the reasons that investors may be willing to bid this stock up," says Maher. It is also a reason equity research firm S&P, which, like BusinessWeek Online, is owned by The McGraw-Hill Companies, identified Park Place as one of 35 stocks to watch for strong performance in 2002.
That's not to say there won't be challenges. Analysts agree 2002 will likely be another difficult year for gaming stocks in general. "It is discretionary, disposable income that is shrinking in a recession," concedes Matt Maddox, Park Place's executive director in charge of corporate finance. However, other issues could favorably affect performance. Gasoline prices have fallen sharply, which has helped boost traffic to resorts in Atlantic City and other "drive-to" properties such as riverboat casinos in the Midwest and South.
Graves sees Park Place's revenues rising modestly from the $4.7 billion projected for 2001. The expected $1.1 billion in EBITDA for 2002 would approximate the figure he's targeting for 2001. Graves foresees the company posting a loss of 3 cents per share when it reports results on Jan. 29, while analysts polled by earnings-tracking service First Call/Thomson Financial foresee a per-share loss 5 cents. Says Graves: "My sense is that Park Place had a pretty good month of December in Atlantic City."
THE VEGAS CARD.
Not all analysts are as optimistic. Joseph Greff, senior gaming and lodging analyst at ABN AMRO in New York, agrees that Park Place's shares are relatively cheap. But Greff, who rates the shares a hold, says he sees no clear catalyst that can move the issues much higher.
What's more, he says, Park Place is more dependent than competitor Harrah's on revenues from Las Vegas, which has seen a big drop-off in customers arriving by air. Harrah's, the second-largest casino operator in terms of revenue, gets more business from drive-to properties in the Midwest, South, and Atlantic City. Park Place faces "a number of challenges," Greff says.
Harrah's is expected to derive more than half its revenues from its Mid-South region, Graves says. About 38% of Park Place's projected 2002 EBITDA is expected to come from its Western region (largely Las Vegas), 36% from its Eastern region (largely Atlantic City), 22% from its Mid-South region, and 9% from international properties. "What really is going to get [Las Vegas-dependent] gaming stocks going again is the return of convention traffic to the Vegas Strip and the return of high-end players," says Greff.
Maddox dismisses the that idea his company is too reliant on revenues Las Vegas. "We are diversified both geographically and by customer segment," he says. "We will participate in the upside when Vegas returns." Things are already looking up, Maddox says. One sign: Park Place has not had any cancellations for conventions scheduled at its Las Vegas resorts in 2002.
Park Place also continues to diversify. It signed a deal to partner with the St. Regis Mohawk Nation in developing a $500 million casino resort in New York's Catskills region, Maddox says. The project has cleared most government hurdles, he says, and the company hopes to break ground near yearend, with an opening planned for sometime in 2004.
One near-term uncertainty: Park Place is looking for a new chief financial officer. Scott LaPorta, CFO since the company was formed in December, 1998, when Hilton Hotels (HLT ) spun off its gaming assets, announced he would leave on Jan. 31 to pursue a new business opportunity in San Francisco.
Maddox insists Park Place won't miss a beat going forward. "One thing about Scott is that he built a very strong management team underneath him," he says. "We have had a lot of very qualified applicants for the job, and we hope to announce something very soon. I think people will be pleased." More than a few analysts think that for investors looking to place a bet on gaming stocks, Park Place is better than just a crapshoot.
Wahlgren covers financial markets for BusinessWeek Online in New York
Edited by Beth Belton
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