
Trump's Trouble Far From Over
Editor's note: "Bricks and Mortar" is a mock portfolio created by reporter Nicholas Yulico that is meant to help generate real estate and gaming-related stock ideas. In keeping with TSC's editorial policy, Yulico doesn't own or short individual stocks.
There are still more ways to lose with casino operator
Trump Entertainment
( TRMP).
I've been warning investors for more than a year now not to own Trump, having "flagged" the company in the "Bricks and Mortar" mock portfolio last January as a stock to sell.
With shares now down more than 80% since
Trump at $17.50, it's tempting at first glance to think the company is now a value play. In fact, Trump likely will see further pain ahead.
The company's report Wednesday of massive losses in the fourth quarter only reinforces my thesis that the Atlantic City casino market -- where Trump has all of its business -- remains weak and won't get better anytime soon. Those deteriorating conditions come as Trump also is grappling with a high debt burden.
Shares of Trump were down 7% to $3.44 Wednesday after the messy fourth-quarter report. Revenue in the period fell 6% to $228.6 million, matching analyst estimates. But adjusted earnings before interest, taxes, depreciation or amortization fell 34% to $22.6 million, much worse than the $32 million that analysts projected, according to Thomson Financial.
Trump's overall loss ballooned to $183.2 million, or $5.89 a share, from $9.7 million, or 31 cents a share, a year earlier.
The bottom-line loss was attributable to impairment charges totaling $238.7 million. About $91 million of the charges related to an unexplained write-down of the Trump Marina property.
Trump's adjusted EBITDA margin for quarter slid to 10% from 14% a year earlier. For the year, this margin was 15%, down from 16% in 2006.
The margin declines come amid high promotional and marketing expenses to offset the slowing economy and gaming competition from nearby Pennsylvania. The state's recent introduction of slot machines is ravaging the Atlantic City market.
In theory, Trump's stock could look attractive because the company's stated book value per share is now $7, with the stock trading at half that price. But the value of the assets on the balance sheet may in fact be overstated, since Trump marked its three casinos to market value in 2005 after its exit from bankruptcy.
It's also important to remember that Trump has $1.7 billion of long-term debt and $121 million of unrestricted cash. That means for the equity to be worth anything, the entire company must be worth more than $1.58 billion -- which may be an aggressive valuation.
Atlantic City results will probably not improve that much in 2008. I expect Trump's revenue to be flat in 2008, with margins remaining steady. As a result, I believe Trump can do $160 million of EBITDA at best in 2008, compared with $144.4 million in 2007.
Even if you give the stock a very generous 10 times EBITDA multiple, then the enterprise value based on my EBITDA estimate is $1.6 billion, barely enough to cover the debt. You can't value the stock on a price-to-earnings basis, because earnings are negative. And the more than 17.5 acres of land that Trump owns in Atlantic City may be worth around $175 million, but finding true value for land in this market is not easy.
Further down the road, the scenario doesn't get much better for Trump. Capital expenditures this year will be around $215 million as the Trump Taj hotel tower is completed, eating away at any free cash flow. The overall return from this project remains questionable.
In 2009 and beyond, annual capital expenditures will probably drop to the $50 million range.
When I throw all this in my model, Trump is just not generating enough free cash flow relative to the huge debt burden.
From 1987 to 2006, average annual casino revenue growth in Atlantic City was 4%, according to New Jersey state statistics. If the past is a guide to the future, then Trump may not return to 2006 EBITDA levels before 2009.
Add it all up, and Trump is one of the worst bets in an industry that has already been slammed lately by fears of an economic slowdown. Casino owners with heavy U.S. exposure such as
MGM Mirage
(MGM) - Get Report
,
Pinnacle
(PNK) - Get Report
and
Boyd Gaming
(BYD) - Get Report
, have all been horrible performers recently.
If you want to own casino stocks, look at names in the Chinese market of Macau -- where growth in the market is still very robust.
Melco PBL
(MPEL)
, which I name as a stock to buy in the "Bricks and Mortar" portfolio, is very attractive at its current price of $11.50.








