Bullish Brokers Boost Station Casinos

Two brokers say the company's recent share decline and debt-refinancing make the stock attractive.
By Eric Gillin ,

Station Casinos

(STN) - Get Report

may be worth a gamble after a recent pullback, with a pair of brokerages saying the casino operator's savvy balance sheet management will help boost earnings in 2004.

Fulcrum Global Partners and Deutsche Bank both told investors to look into shares of the company on Wednesday morning, citing strong business in its core Las Vegas locals' market and a number of catalysts that could boost the stock going forward. In reaction, shares of Station, which have dropped 6.3% in the last week, were up $1.29, or 3.8%, to $35.45.

"The pullback is one of the unique buying opportunities we believe investors will find in 2004 as our expectation for earnings outperformance and further growth opportunities becomes evident," said Marc Falcone, gaming analyst for Deutsche Bank Securities.

One reason for the expected outperformance is Station's recent efforts to refinance debt at lower rates. On Monday, the company refinanced a $350 million bond issue that had a rate of 9.875% for one with a rate of 6.875%. According to Deutsche Bank, which co-managed Station's $350 million debt-restructuring as well as a $400 million debt-refinancing two weeks earlier, Monday's move will save the company $10.5 million in interest expense, adding 10 cents to earnings per share in 2004.

Other brokerages, which do not have banking interests with Station, agreed the debt-refinancing would boost earnings in fiscal 2004. Joseph Greff, analyst with Fulcrum Global Partners, which has not received fees from Station for refinancing debt, raised his 2004 estimate to $1.83 a share -- the highest on Wall Street, according to Thomson First Call. Greff also raised his 2005 earnings estimate to $2.19 a share, also the highest on the Street.

"In our view, recent weakness in Station is an enhanced buying opportunity, as fundamentals in the Las Vegas locals market and Thunder Valley remain strong," said Greff, in his research note.

Indeed, recent channel checks by Wall Street analysts reveal that Station continues to benefit from the spread of Native American gaming in California. After visiting the company's Thunder Valley property, which it manages on behalf of the United Auburn Indian Community, Goldman Sachs analyst Steven Kent said that business remains extremely strong.

"Thunder Valley does not appear to have lost its thunder since its opening on June 2003," said Kent. "We were amazed at how crowded this Station-managed casino was on a Thursday afternoon. The slot machines were jam-packed and the tables ran two to three people deep."

Station has bright hopes for Thunder Valley, predicting that it will receive between $65 million and $75 million in management fees from the property in 2004, and is using it as a blueprint for business going forward. The company recently signed a deal with another tribe to co-manage a casino in Chico, Calif., and plans to start managing a Michigan casino in 2005 in another tribal venture.

Such deals are usually very lucrative and low-risk, with casinos like Station putting up little money in exchange for hefty fees to run the casino. And with three deals under its belt, both Greff and Falcone agree that Station may have more good news that could boost shares, either a deal to manage a casino on behalf of a new tribal partner, or the expansion of an existing property.

"We believe that Station is close to announcing at least one more Native American deal, although this time, we believe the project could be an existing and under-managed gaming facility in California," said Greff. "This type of management contract would be immediately accretive to earnings."

But the competition for Native American contracts is fierce, with Station's rivals making moves of their own to combat its expansion in a growing market. Since the passage of a law allowing gaming on tribal lands in California, more than a dozen casinos have been built in the state and even more are planned.

A week ago,

Caesars Entertainment

(CZR) - Get Report

announced plans to build a $200 million casino outside Fresno, Calif., with the Big Sandy Band of Western Mono Indians. The move added another tribal partnership to Caesars' growing portfolio, which includes a casino project in northern San Diego County and another in the Catskills Mountains of New York.

While Caesars' moves won't directly affect Thunder Valley's results for a while, the April relaunch of the Cache Creek casino in nearby Capay Valley, Calif., could nip into Thunder Valley's business. After the expansion is completed, Cache Creek will have 2,000 slots and 135 gaming tables, slightly more than the 1,906 slots and 100 gaming tables at Thunder Valley. Goldman Sachs said business was still strong in Cache Creek, despite the construction.

Despite growing competition, analysts say that Station's rapid-growth story remains intact, making it one of the most compelling investments in the gaming sector, especially given recent weakness in shares. More than half of the Wall Street analysts who cover the company rate it buy.

"We believe that Station is positioned for high-teens EBITDA compound annual growth rate through 2007," said Greff. "There is no other gaming operator out there with such a visible, attractive growth profile, in our view."

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