Analysts divided on Station’s deals in Missouri, Vegas

David Strow

Friday, July 21, 2000 | 10:51 a.m.

As heavy selling hit the stock of Station Casinos Inc. Thursday, analysts were mixed on whether investor concerns over Missouri investigations are justified.

Investors had a wide slate of news to react to Thursday. In one day, Station announced the sale of the two Missouri casinos for $475 million, the purchase of the Fiesta hotel-casino in Las Vegas for $185 million and a profit of 33 cents per share for the quarter ending June 30, 1 cent ahead of analyst expectations.

The company also announced, for the first time, that two of its top executives, Chairman and Chief Executive Frank Fertitta and Chief Financial Officer Glenn Christenson, have been subpoenaed to testify before a grand jury on the activities of Michael Lazaroff, its former outside counsel in Missouri.

Station closed Thursday at $13.13, down $2.81 -- a one-day decline of 17.5 percent. Volume was 5.1 million shares, the busiest day by far this year.

This morning, Station was beginning to recover its footing, as shares by midday rose 50 cents to $13.63, a gain of nearly 4 percent. Trading remained extremely heavy, with 2.1 million shares trading in three hours.

Virtually all analysts believe Thursday's sell-off was partly the result of fears over the Missouri investigations. Another big factor, analysts said, is the short-term dilution in earnings that will result from the deal.

"We wouldn't be too upset to see the transaction called off because of market conditions, but we think there's a long-term strategy to doing this," said Robin Farley, gaming analyst with PaineWebber. "The market never welcomes a longer investment horizon. But the fundamentals that made Station an attractive stock haven't changed."

But one analyst, David Anders of Merrill Lynch, responded to the deal by downgrading Station from a "near-term buy" to "near-term accumulate," voicing concern over continuing developments in Missouri, short-term earnings dilution and his belief that Station is unlikely to exceed earnings expectations in the near term.

"I was surprised by the grand jury investigation (announcement)," Anders said. "The grand jury investigation in Missouri will continue to be a nagging issue impacting valuation."

Fertitta and Christenson will testify before a federal grand jury in an investigation into $500,000 in bonus payments made by Station to Lazaroff. Lazaroff pleaded guilty last month to charges that he falsified bills to clients to charge them for $380,000 in entertainment and gifts they thought they were receiving for free. Separately, the Missouri Gaming Commission will hold hearings Aug. 30 in Kansas City to look at the Lazaroff payments.

Neither Station nor the U.S. Attorney's Office in Kansas City will say who or what is being investigated by the grand jury, though Station executives firmly denied any connection between the Missouri sale and the grand jury investigation, and denied any wrongdoing in the Lazaroff matter.

But not everyone was convinced.

"There is a combination of disquieting circumstances here," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "These include the guilty plea of Lazaroff, and the recent resignation of Joseph Canfora at another casino property (Horseshoe Gaming Inc.) Canfora was once an employee of Station's (in Missouri), and sued Station in connection with a wrongful termination suit. It was during such litigation that the Lazaroff payments surfaced.

"These events may be coincidence, and they may not be. The implications from the point of view of the investor are not pleasant."

But Harry Curtis, gaming analyst with Robertson Stephens, believes it's a mistake to read too much into the subpoenas.

"Remember that a subpoena is only an invitation to discuss (an issue)," Curtis said. "Station maintains that it's unaware of any wrongdoing. There's no way for someone sitting in New York City to dispute that.

"Remember that the U.S. Attorney in St. Louis, during the investigation of Mike Lazaroff, did not implicate Station in any way. It seems to me that if they sell their Missouri assets for $500 million, and there's no other financial repercussions, (Thursday's) reaction in the stock price will be temporary."

It isn't the first time a grand jury has convened in Kansas City to look at a gaming company. In 1998, Hilton Hotels Corp. faced a grand jury investigation over allegations that the company paid $250,000 to associates of the former head of the Kansas City Port Authority to secure a better site for its Kansas City Flamingo Hilton. But before any charges or indictments were leveled, the company settled, paying $655,000 to the federal government. Later, under pressure from Missouri gaming regulators, Hilton put the Flamingo on the block, ultimately selling it to Isle of Capri Casinos Inc.

Prior to Isle of Capri, Station emerged as the buyer of the Flamingo riverboat. But regulators in Missouri, conducting routine audits during the Flamingo investigation, discovered the payments to Lazaroff. The deal was held up, and later called off.

Station is selling its two Missouri casinos to a group led by John Finamore, vice president of midwestern operations, and William Warner, Station vice president of finance. Other members of the Missouri group are Troy Stremming, the company's midwest counsel; Thomas Burke, general manager in Kansas City; and Anthony Raymon, general manager in St. Louis.

Following Thursday's market close, Stuart Linde of Lehman Bros. upgraded Station from "outperform" to "buy," calling Station "a terrific opportunity at these levels."

"We thought (Thursday's) trading activity was rather perplexing," Linde said. "We found the valuation (of the Missouri casinos) quite satisfactory. Everything remains the same, except that there is no Missouri assets which, quite frankly, investors were unhappy with for the longest period of time."

Linde also doubted the grand jury investigation will uncover any new details.

"Don't you think someone would have sniffed it out already?" Linde said. "They've been investigating this for some time now.

"Even if the worst case scenario came true, which we do not expect ... investors should really understand that the intrinsic value of these assets is higher than $13 per share."

In the short term, Station said Thursday's web of deals will be dilutive to earnings. As a result, several analysts cut their earnings estimates; Anders reduced his 2001 estimate from $1.44 to $1.20 per share, while Curtis reduced his 2001 estimate from $1.43 to $1.30.

"I'm disappointed in the near-term earnings dilution, but in the long run, Station has sold an asset for $500 million, and they'll redeploy their capital in a much more stable market," Curtis said. Curtis maintained a "buy" rating on Station.

Though he expressed concerns over Missouri investigations, Anders believes the Missouri deal makes financial sense for the company, even though the two casinos had seen significant improvements in earnings and cash flow.

"The real issue is when Station would need to put additional capital into upgrading the St. Louis casino," Anders said. "That could have been as high as $100 million. I don't think Station really wanted to do that.

"The Las Vegas locals market really is one of the best for gaming companies. (Buying the Fiesta) will enhance their position."

Anders also said the Missouri sale could make it easier to negotiate a takeover of Station, though he said he hadn't heard of a pending deal to do so. Missouri, he said, has proven "not to be a real casino-friendly environment."

"Many likely buyers would not want exposure in Missouri," Anders said. "If management ever wanted to sell the company ... the sale of the Missouri operations would make the sale of the corporate entity easier."