Station stock jumps on strong quarterly earnings

David Strow

Tuesday, April 11, 2000 | 11:13 a.m.

Fertitta paid $3.24 mil. in '99

Station Casinos Inc. Chairman and Chief Executive Frank Fertitta received $3.24 million in compensation in 1999, a substantial increase over his previous pay.

Fertitta received $1.25 million in salary and $1.75 million in bonus payments in 1999, according to proxy documents filed with the Securities and Exchange Commission. Additional compensation totaled $250,000.

Fertitta also received 150,000 stock options during the year. The 10-year stock options carry an exercise price of $22.94 each, giving them a current cash value of $121,000. Should Station's shares rise at an annual rate of 10 percent per year, the options would be worth $5.84 million in 2009.

Station changed the end of its fiscal year from March 31 to December 31, so a direct comparison to his previous year's pay is not available. In the nine months ending Dec. 31, 1998, Fertitta earned a total of $1.8 million in pay, while his salary for the year ending March 31, 1998 was $2.04 million.

Station also said in the proxy that it signed a five-year employment agreement with Fertitta in December entitling him to at least $1.25 million in pay per year.

The employment agreement includes a "golden parachute" entitling Fertitta to three times his base pay, multiplied by 175 percent, as well as bonuses equaling three times his base pay multiplied by 75 percent. These payments would be "grossed up" to cover taxes.

The total value of this parachute is nearly $10 million.

Shares of Station Casinos Inc. roared ahead nearly 15 percent this morning, the first day of trading after the Las Vegas locals casino operator smashed through Wall Street's quarterly earnings expectations.

Station on Monday afternoon reported record net income of 53 cents per share, 20 percent higher than analysts' consensus expectations for the quarter ending March 31. In the year-ago quarter, Station lost 11 cents per share after special charges.

Even without considering those charges, Station tripled its net income for the quarter.

Earlier in the quarter, Station alerted analysts that it expected to beat initial expectations for the quarter by 30 percent, causing Wall Street to hike its estimates. The company ended up beating those initial estimates by 60 percent.

"It was a blowout quarter," said Joe Coccimiglio, gaming analyst with Prudential Securities. "If they can sustain these margins for the rest of the year, there's enormous upside for the stock."

While revenue rose 11 percent to $254.8 million, Station's cash flow increased 34 percent to $55.7 million.

"The Las Vegas locals market has been just dynamite," said Glenn Christenson, chief financial officer of Station. "Last year, North Las Vegas (win) was up 17 percent, and the Boulder Strip was up 9 percent. We're getting a disproportionate share of that growth.

"Clearly, one of the most important assets we have is our brand-name franchise in Las Vegas."

Station's four big properties in Las Vegas -- Boulder Station, Texas Station, Palace Station and Sunset Station -- each reported all-time record results, as did Station Kansas City. Nevada cash flow rose 32 percent, to $58 million, while Missouri cash flow soared 42 percent to $22.2 million.

"We're enjoying economies of scale because of the distribution we have in this (Las Vegas) market," Christenson said. "Because of the leverage in our business, we're driving more of that growth to the bottom line."

Analysts are already reconsidering their future projections as a result of the earnings announcement -- this morning, Goldman Sachs analyst Steven Kent raised estimates for 2000 from $1.65 to $1.80 per share, and 2001 estimates from $1.85 to $2. Other analysts may soon follow.

"I would say it's safe to say we're reviewing our estimates, with an upward bias for the next few quarters," said Deutsche Banc Alex. Brown analyst Robin Farley. "We raised our expectations seven times last year as they kept blowing through forecasts."

But Station's earnings announcement will probably mean more than giving the stock a short-term pop. Station's strategy is to fund future growth though cash flow -- and strengthening cash flow means the ability to fund more projects, as well as pay down debt and buy back stock.

In the immediate future, Station will focus on its two announced projects -- the $55 million expansion of Texas Station and a $260 million resort casino in Green Valley, built in partnership with American Nevada Corp. Station's direct cash contribution to the Green Valley project will be about $40 million.

"We have six gaming entitled sites we can begin at any time, and our properties are master planned for future expansion," Christenson said. "We can pick any one of these sites off the shelf and plug it in.

"We are monitoring the situation very closely. If the business situation demands (expansion), we will do that."

Farley believes the most immediate expansion opportunity for Station will be Craig Ranch Station, approved by the North Las Vegas Planning Commission last month for siting near the intersection of Martin Luther King Boulevard and Craig Road. Station's license to build the project expires in early 2002.

Although Station hasn't formally announced the project, "with the timing window there, something has to come out," Farley said.

And such projects will be a far easier sell after Monday's numbers, said Lehman Bros. analyst Stuart Linde.

"They've exceeded every expectation, and I think they have tremendous goodwill with Wall Street right now," Linde said. "(Investors) have been very receptive to the expansions they're doing, like Green Valley Ranch.

"People look for a very solid return on invested capital, and they've traditionally built well."