Park Place Entertainment
rose more than 4% Tuesday after Merrill Lynch upgraded the casino to buy from neutral, telling investors that Atlantic City results could be better than expected.
In addition to raising his rating, Merrill Lynch analyst David Anders established a 12-month price target of $13, implying upside of 25% over the next year. In reaction to the upgrade, Park Place shares jumped 44 cents to $10.66.
A major factor in Anders' upgrade is the possibility of better-than-expected results from Park Place's Atlantic City operations, which include the Atlantic City Hilton and Bally's Park Place, and account for 36% of earnings before interest, taxes, depreciation and amortization.
With this summer's launch of the Borgata, a joint venture between
( MGG), many are concerned that Park Place and rivals in Atlantic City will engage in the kinds of promotional gimmicks that have watered down profits in the past. But after meeting with managers in Atlantic City, Anders said discounting may not be as likely now that the top three players control 76% of the market.
"Managers have become more cognizant of the negative repercussions of excessive promotions," said Anders. "Investors may recall that excessive promotions have always been a drawback of the Atlantic City market; however, given all the consolidation that has occurred over the last five years, the market appears to be more rational."
Outside of Atlantic City, which is the single biggest source of EBITDA, business looks strong. In Las Vegas, which contributes 34% of EBITDA, Park Place's high-end room rates were up 10.7% year over year in the fourth quarter, while lower-end property room rates were up 14.2%, Anders said. Furthermore, leisure travel to Las Vegas has been picking up steam overall, and industry sources have been reporting that the convention outlook for 2004 is robust.
Park Place is positioning itself to take advantage in Las Vegas in 2004, when it completes the lion's share of its Caesars Palace renovation, with the new Coliseum at Caesars Palace unveiling in March and the new Roman Plaza entryway debuting in the summer. With new shopping and walkways to get in and out of a remodeled Caesars, Park Place's Las Vegas offerings will be stronger in 2004.
With both Las Vegas and Atlantic City operations well positioned for 2004, Anders said the company's valuation is compelling given that it's historically traded at a discount to more Las Vegas-centric casino stocks.
"We believe that the discount can narrow, owing to a stabilized environment in Atlantic City, increased familiarity with the new management team that has been in place for just over one year
and potential earnings surprises from better-than-expected cost controls," said Anders.