Bullish on Rio, analyst hikes price target for Harrah’s

Tuesday, Sept. 12, 2000 | 10:34 a.m.

Merrill Lynch gaming analyst David Anders raised his 12-month price target for Harrah's Entertainment Inc. of Las Vegas from $29 to $33, saying he's optimistic that its struggling Rio hotel-casino "should ultimately be able to generate $80-100 million in (cash flow)."

The off-Strip Rio, acquired by Harrah's in January 1999, has struggled since the fourth quarter of 1999. Cash flow plummeted from an all-time high of $29 million in the third quarter of 1999 to just $1 million in the quarter ending June 30, 2000.

Anders blamed the poor performance on a string of bad luck at the Rio tables, noting that table hold fell to 8 percent during the June 2000 quarter, compared to a historical average of 21 percent. This poor hold reduced cash flow by $35 million, and earnings by 18 cents per share, Anders estimated.

Secondly, Anders cited increases in operating expenses, which have risen 6 percent in 2000 while revenues have declined. Anders tied most of these increases to promotional expenses tied to the Rio's new entertainment offerings, but said he believes these expenses are now declining. Anders also said that new competition from the Bellagio, Mandalay Bay, Paris and Venetian "may have also somewhat depressed the property's earnings."

Anders said he expects the Rio's cash flow to rise from $44 million in 2000 to $77 million in 2001.

He also set a 2000 earnings estimate of $1.65 per share for Harrah's, and $2.00 in 2001.

"Just normalizing the hold would add $35 million to (cash flow), and accordingly, any expense reduction would result in our (cash flow) estimates being surpassed," Anders wrote. "We have found that other similar facilities, such as Treasure Island, Monte Carlo and New York-New York generate approximately $80-100 million in (cash flow) annually. Now, unless the Rio is materially flawed, which we do not think is the case, we suspect our (cash flow) estimates could prove conservative."