Station Casinos Draws a Crowd

A combination of savvy debt-management and Native American gaming partnerships is fueling earnings growth at Station Casinos ( STN), with a number of Wall Street brokerages boosting estimates on Friday.

On Friday, Station announced an agreement with the North Fork Rancheria of Mono Indians to manage and develop a casino in Madera County, in California's Central Valley. This is the latest in a string of Native American partnerships from the casino operator, best known for casinos that cater to the Las Vegas locals' market, like the Wild Wild West Gambling Hall & Hotel. Shares of Station rose $1.40, or 3.7%, to $39.73 on news of the deal and rising estimates.

In order to begin development, the tribe must receive approval from national authorities and the state of California, which could be a contentious issue.

"While Station has secured two parcels of land for the benefit of the tribe, a compact with the state must be negotiated, land must be brought into trust, and the National Indian Gaming Commission must approve the management agreement," said William Lerner, gaming analyst at Prudential Equity Group, who boosted his price targets and estimates on the company.

Under the terms of the agreement, Station Casinos will advance funds and handle the financial arrangements for the casino development, which is expected to cost less than $225 million and include 2,000 slot machines and 70 table games. Once the casino is up and running, the tribe will reimburse Station for the money it initially laid out and pay Station 24% of the casino's net income. Once open, Prudential estimates North Fork could add between 7 cents and 10 cents to Station's earnings per share on a pro-forma basis.

The structure of the North Fork deal highlights one of the big reasons why Station and rivals like Caesars Entertainment ( CZR) are partnering with tribes on casino projects. For both parties, the move is a win-win. The casinos get a generous return on an extremely small initial investment, while tribes gain access to capital, an established brand name and experienced management.

Tribal partnerships are an increasingly large part of the Station growth story. In June 2003, the casino operator opened the Thunder Valley Casino in a partnership with the United Auburn Indian Community, which netted the company $17.2 million in revenue during the fourth quarter. For the fiscal year, Station said Thunder Valley could generate between $65 million and $75 million in fees.

In addition to North Fork partnership and the Thunder Valley Casino, Station has an agreement to develop a casino in Chico, Calif. with the Mechoopda Indian Tribe and another to develop a casino in Michigan with the Gun Lake Tribe. Station expects partnerships to fuel growth going forward, with earnings per share growing between 25% and 28% through 2007.

Analysts concur and say Station could see even more upside as these tribal partnerships -- most of which are more than a year from generating revenue -- start to affect earnings.

"The North Fork deal represents Station's fifth Native American management agreement, four of which are in various stages of development," said Lerner, in a note. "A look at the company's development pipeline suggests an estimated ? 50 cents to 55 cents in incremental pro forma EPS."

In Prudential's view Station's shares, currently near $40, could be worth between $63 and $83 a share once all the projects come on line.

While Station makes deals to grow revenue and earnings, it's also using the improving business climate to remold its balance sheet and lower debt payment costs. Over the last month, the casino operator has been extremely aggressive on this front -- prompting 14 analysts to boost their 2004 estimates by an average of 5 cents over the last four weeks.

Late Thursday, the company issued $450 million in debt at 6%, much lower than the nearly 10% it was forced to pay years ago. Last week, Station refinanced $350 million in debt, which Deutsche Bank said would boost 2004 earnings by 10 cents a share. Three weeks ago, the company refinanced $400 million in debt.

"Station has now issued $1.25 billion of new debt, significantly extending its maturities, while at the same time receiving investment grade-like covenants," said Marc Falcone, analyst for Deutsche Bank Securities, which received banking fees for all three debt deals. "We believe Station will now have one of the lowest costs of capital in the gaming industry."

And Station plans to use the money to fuel future growth.

The casino now has plans to build five casinos over the next few years, but none looms larger than its Red Rock Casino project, the company's sprawling, next-generation Las Vegas locals' casino complex. Red Rock is expected to open in 2006 and in a recent conference call, the company said it hoped to expand the Wild Wild West Casino and a number of existing properties.

Already established as the market leader in the lucrative Las Vegas' locals market, Station is moving to become the market leader in Native American casinos as well. Although it faces stiff competition from Caesars, with a stronger balance sheet and solid management team, Wall Street analysts believe the company can accomplish its goal.

"We continue to believe that Station is the best operator story in the casino industry will same-store sales growth, unit growth opportunities, and a leadership position in management contracts for tribal gaming," said Steven Kent, gaming analyst at Goldman Sachs.

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