Park Place insists it’s on track

David Strow

Friday, Jan. 5, 2001 | 10:41 a.m.

Today's trading

Park Place Entertainment Corp. stock was holding steady this morning after Thursday's sell-off, but selling activity was spreading to other major gaming stocks.

As of mid-day on Wall Street, Park Place was trading at $10.06, up 6 cents from its Thursday close. But shares of Mandalay Resort Group, MGM MIRAGE, Harrah's Entertainment Inc. and Station Casinos Inc. were all taking hits.

Worst hit was Station, which fell $1.25 to $14, a 8.2 percent decline. Harrah's was off $2.06 to $24.25, a 7.8 percent drop.

Selling in Mandalay continued, as its shares retreated $1.06 to $19.94, a 5 percent decline. MGM MIRAGE traded down $1.06 to $27.63, a 3.7 percent decline.

Within hours of Park Place Entertainment Corp.'s announcement that it would badly miss fourth-quarter earnings estimates, analysts and investors took swift, harsh action.

A heavy sell-off of Park Place stock ensued, as the company's shares fell $1.94 to $10 -- a 16 percent one-day drop that saw the stock fell 20 percent before rebounding a little. And five Wall Street brokerages cut their ratings on the company's stock.

"They have to start making the numbers (analyst expectations)," said William Schmitt, gaming analyst with CIBC World Markets, who cut Park Place from "strong buy" to "hold" Thursday. "Buying back stock won't move it in the near-term. There's more risk introduced into their story now because of the shortfall (in earnings), and the situation at Paris/Bally's.

"There are some issues they have to work through. Until there's clarity in the numbers going forward, we'll see it in the $9-10 range."

But Park Place was swift to respond to pessimism, calling the fourth-quarter shortfall a temporary blip, rather than a warning signal of long-term problems developing at Park Place. And a company official hinted that an aggressive program of stock repurchases and debt repayment from Park Place cash flow will continue.

"We remain very confident in our business plan and assets going forward, especially in light of our free cash flow, in excess of $500 million (annually), which gives us tremendous financial power and flexibility," said Park Place Chief Financial Officer Scott LaPorta. "We have a very good track record of meeting or exceeding expectations with regards to our earnings.

"In our two years of existence, we've met or exceeded expectations seven of eight times, and we view the fourth-quarter as an anomaly."

Park Place warned it would report zero cents per share in fourth-quarter earnings before one-time charges. That makes it likely the company will post a loss, as Park Place has said it recorded a one-time charge of $15 million associated with benefits and compensation paid to fulfill the contract of former Chief Executive Arthur Goldberg, who died in October.

Analysts had expected 13 cents per share.

The announcement led Bear Stearns to downgrade Park Place from "buy" to "attractive"; Salomon Smith Barney to downgrade it from "buy" to "neutral"; Bank of America Securities to downgrade from "strong buy" to "buy"; and Wasserstein Perella Securities to downgrade from "buy" to "hold."

There appeared to be some spillover to other gaming stocks. On Thursday, Mandalay Resort Group fell 6.5 percent to $21, MGM MIRAGE dropped 1.2 percent to $28.69 and Harrah's Entertainment Inc. retreated 2.3 percent to $26.31.

"There continues to be some small pieces of evidence that there could be moderating business volumes in Las Vegas, but I don't think that (affects) every company," said Marc Falcone, gaming analyst at Bear Stearns. "Certain properties will be hurt more than others ... I think the lower to middle end, as opposed to the higher end."

"What I'm hearing is that MGM is fairly lucky (in terms of hold), and will make its numbers, and Mandalay is a toss-up," Schmitt said. "Overall, the dynamics of what's going on is (growing competition from Indian casinos) in California, and (airplane) seats coming out of the airport."

Some Park Place issues weren't as troubling to analysts from a fundamentals perspective. Poor results caused by bad weather in the Midwest and East are seen as a one-time event, while a low hold percentage is merely bad luck, rather than troubling fundamentals.

More troubling, however, was the decline in business at the Paris/Bally's Las Vegas complex, as well as difficulties with increased competition in Mississippi. Analysts were also concerned about the planned sale of the Las Vegas Hilton to Los Angeles developer Ed Roski, which now appears all but dead.

"(Geographic diversity) should provide some diversity in risk, but in this quarter it provided more opportunities for things to go badly," said UBS Warburg gaming analyst Robin Farley. "The big thing are issues that will be long-term trends.

"Paris isn't (a short-term problem), and the competitive nature of Mississippi isn't."

Farley called the decline in business at Paris/Bally's "a sophomore slump," caused by tough comparisons to a booming quarter in 1999.

Schmitt was more cautious about the property, noting that the two properties underwent a management shake-up when Paul Pusateri resigned as president in October.

"They need to fix that," Schmitt said.

Falcone focused his concerns on problems in Mississippi, both in Tunica and Biloxi.

"Tunica will continue to be a challenging market for all operators, particularly Park Place," Falcone said. "There's no signs that will improve in the near term. And the Gulf Coast may have reached a bottom-out point, but we're not seeing opportunities for growing cash flow at this point."

The pending end of the Hilton sale will impact Park Place from two directions, analysts say. First, cash proceeds won't be available to buy back shares and pay down debt, which would help raise share prices; and second, the Las Vegas Hilton's financial struggles will continue to dilute Park Place earnings.

"The property has struggled over the last two quarters, and it will take some time, if Park Place isn't able to close the sale, to grow that property's business," Falcone said.

The Hilton posted negative cash flow of $1 million during the quarter ending Sept. 30, 2000, compared to positive cash flow of $12 million in the year-ago quarter. Park Place has indicated it doesn't plan to put the property back up for sale if the Roski deal dies; observers believe that's because the property's poor financial performance would make it difficult to get an attractive offer for the property.

No one on Wall Street is yet willing to predict Park Place could be a takeover target -- primarily because no one in the gaming industry could realistically make a run at the company at the moment, analysts say.

"Realistically, I just don't see a buyer for Park Place," Falcone said.