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Too Many Bets Placed on Empire Resorts

The stock hasn't priced in the risk facing a Catskills casino.

The planned Indian casino in upstate New York would be a tremendous success for the state, the tribe and

Empire Resorts

(NYNY) - Get Empire Resorts, Inc. Report

, the company that would manage the property.

Empire Resorts' stock is up 36% this year on news that the long-planned Catskills casino is close to final approval. Last Tuesday, New York Gov. Eliot Spitzer gave his final approval for the project, sending shares up 19% last week alone.

Anyone thinking of jumping on the bandwagon of Empire's stock is likely too late, however. And those who are already on board might be wise to cash out.

At just under $12, the stock is trading close to full value, according to's

estimates. If you throw in any sort of meaningful risk that the project won't get final approval from the federal government, then the stock looks expensive.

The planned $600 million casino would sit next to Empire's Monticello Raceway in the Catskills region of upstate New York, about 1½ hours from New York City.

For the project to be built, the federal government must approve the transfer of 30 acres of land that Empire owns to the U.S. government. The property will then be held in a trust for members of the St. Regis Mohawk tribe, who will profit most from the site.

It's hard to handicap the odds for federal government approval.

Numerous lawsuits from environment groups and others have popped up in recent weeks, which is typical when it comes to casino developments.


New York Post

article this week, meanwhile, said that federal officials have been working on proposals in recent months to limit the type of land transfer that Empire and the Mohawk tribe is seeking.


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said it obtained a December letter from a top Interior official warning the St. Regis Mohawk tribe that the government is already seeking new rules "that may result in fewer off-reservation properties" being added to tribal lands through a trust, as the Mohawks are seeking to do at Monticello.

"The sentiment is the Department of Interior is against so-called reservation shopping," or the process of transferring off-reservation properties into tribal control, says Joe Weinert, a casino consultant with Spectrum Gaming. "But in this instance I think there is a lot more hope, because the tribes, and to some extent the state, have been trying for so long to make this happen."

The fact that the casino would be located in an economically distressed region could also improve the odds of passage, Weinert says.

The proposal also has the strong backing of New York politicians, including Sen. Charles Schumer (D-NY).

All Money on the Table

Since no Wall Street analysts cover Empire Resorts,

took a stab at estimating how much value the Catskills project will add to the company.

If the land transfer is approved, our estimate says Empire Resorts' stock is worth between $12 and $13 a share. Empire closed Friday at $11.86.

That means Empire is trading near full value, despite the slight risk of the casino project not getting final approval from the federal government.

All of Empire's current profits come from Monticello Raceway, which offers horse racing and video lottery terminals. The company reported a net loss last year, but posted earnings before interest, taxes, depreciation and amortization of $5.5 million for its trailing 12 months.

If the Catskills casino project is approved, Empire will collect a management fee for running the casino site for the Mohawk tribe. Although the exact agreement hasn't been finalized, the proposed structure is a seven-year management contract that would entitle Empire to receive 30% of the net income from the property.

Since the tribe would not pay taxes -- aside from paying out about 25% of the slot revenue to the state -- an EBITDA number for the property will approximate net income, Empire says.

The company projects the casino will have 125 table games and 3,500 slots, with the capacity to add another 500 slots.

Empire has not specifically given guidance for the project, but the company's chief financial officer, Ronald Radcliffe, provided us a framework for building a model.

Radcliffe says that the slots at the Catskills project should be able to grab two-thirds of the daily win per machine of the slots at Mohegan Sun in Connecticut. Mohegan's slots grab a $400 win per day per machine.

For the table games, Radcliffe declined to give a specific win number, but several Wall Street analysts say that a win number between $1,500 to $2,000 per table per day is a good range. Our projections use the low end.

Although an agreement hasn't been finalized, New York state is expected to eventually take about 25% of the slots proceeds, with the possibility of a lower 22% in early years. Our estimate assumes the 25% state payout.