Investor fears surrounding the temporary shutdown of Atlantic City casinos may be creating a nice opportunity to gamble on Trump Entertainment ( TRMP). The stock dropped nearly 4% Wednesday on worries of a profit hit, since each of Trump's three casinos is located in the city. Atlantic City casinos were
forced to close Wednesday at 8 a.m. as part of an impasse on the approval of a new government budget in New Jersey. The closure is said to be costing casino operators more than $16 million of profit per day, and Trump is losing a penny of earnings per share a day during the shutdown, by one estimate. However, for the long term, Trump's casinos may be best poised to capitalize on the rebirth of Atlantic City as a hip East Coast version of Las Vegas, some industry watchers say. "If you want to get into Atlantic City, Trump is the best way to get into a market that is well in demand. A lot of casino operators are saying Atlantic City is the best market to be in," says Eric Green, a portfolio manager with Penn Capital Management, which owns Trump shares. He believes that the stock's recent pullback provides an attractive entry point for investors. The knock on Trump is that the company has underinvested in its properties for years because of a large debt load. Last year, Trump exited bankruptcy and secured a reorganization plan that lowered its overall debt load from $1.8 billion to $1.4 billion at the end of its most recent quarter. The plan's $500 million line of credit and cash from a recent Indiana casino sale are helping Trump pay for the current $110 million renovation of its three properties --- the Taj Mahal, Trump Marina and Trump Plaza. This summer, Trump will break ground on a new $250 million hotel tower at the Taj Mahal.
All this investment comes at a time when the future is looking much brighter for Atlantic City. The area used to be viewed as the shadier cousin to Las Vegas, but it is now drawing billions of investments and wealthier younger visitors, a trend that has been in motion since the successful Borgata casino opened in 2003 as a joint venture between Boyd Gaming ( BYD) and MGM Mirage ( MGM). On the operations front, Trump is updating its player-tracking technology. Eventually, common players cards will be provided, which will allow more cross-promotions between the three sites, "so we're operating as one company with three different outlets, as opposed to three different companies," says Trump Chief Financial Officer Dale Black. Black says the current shutdown likely won't affect the company's expansion plans. He declined to provide estimates on how much money Trump might be losing on a daily basis, but did say that 80% of the company's revenue comes from the casino floor. Steven Gart, senior investment analyst with hedge fund Nickel Capital, says Trump is likely losing $750,000 per day of earnings before interest, taxes, depreciation and amortization. Nonetheless, most analysts agree the current government shutdown will be a one-time, nonrecurring hit to earnings that masks the growing opportunity of the Atlantic City market. Gart says a recent trip to Atlantic City left him with the feeling that the city was becoming more Vegas-like. "We believe that the casinos are making a solid effort to draw in the youth and the high-end gaming crowd by renovating existing properties and adding new amenities," Gart says. "It's not just Borgata off the boardwalk now, but the boardwalk itself seems to be in a reinvent mode and becoming sexier." The city has a number of positive catalysts on the horizon over the next year, Gart says. The newly approved
direct rail service from New York City , along with a planned boardwalk shuttle tram, will help improve the infrastructure.
Trump Plaza could be one of the biggest beneficiaries of walk-in traffic from a cleaned-up boardwalk. The casino is near the new "Pier at Caesar's" redevelopment, where high-end retailers such as Tiffany and Louis Vuitton will be located, along with fancy restaurants. The pier site is connected to the Caesar's casino owned by Harrah's ( HET). Trump's Atlantic City casinos were lagging the group of late, with May gaming revenue down 4% from a year ago, in part because of disruptions from renovations. If the current shutdown lasts longer than just a few days, then Trump shares may continue to underperform Harrah's and Boyd Gaming, which have less of a reliance on Atlantic City. Trump shares closed down 3.9% to $19.50 Wednesday and now trade at an enterprise-value-to-2007-EBITDA ratio of 8.7 times, which is near the industry average. Wall Street analysts, on average, are expecting Trump to increase EBITDA from $205 million in 2006 to $234 million in 2007. The new Taj hotel tower won't meaningfully affect earnings until 2008. However, investors may be getting the future benefits from the Taj expansion for free. Trump has another 9.7 acres available for future development at its Atlantic City sites, which Deutsche Bank analysts say is worth $1 per share. The Taj hotel tower will bring about $3 of added value. Investors should also realize that Donald Trump no longer plays much of a day-to-day role in Trump's operations, but does help the brand. Trump remains chairman of the company and is its largest shareholder. His contract requires him to make appearances at Trump casinos throughout the year, and the company has the exclusive rights to his name in relation to gaming operations. Jim Perry, Trump's CEO, helped return Argosy Gaming to profitability before the company was eventually sold to Penn National Gaming ( PENN). In a effort to diversify into new markets, Trump recently announced a joint venture with a local casino builder to develop a casino in Diamondhead, Miss. Trump also has possible projects brewing in Pennsylvania, which recently gave the green light to slot machines, and in Rhode Island.