Gaming stocks pounded after Harrah’s issues profit warning for quarter

David Strow

Friday, July 6, 2001 | 10:47 a.m.

A widespread sell-off of gaming stocks began this morning, following Harrah's Entertainment Inc.'s warning that it wouldn't meet analysts' profit expectations for the quarter ending June 30.

Harrah's announced Thursday afternoon it would post earnings of 46 to 50 cents per share -- about $54 million to $59 million in net income -- for the second quarter. That would be an increase of 15 to 25 percent over the year-ago quarter. But analysts had expected 55 cents per share.

Revenue should be up about 4 percent, while cash flow should be about equal to the year-ago quarter, company officials said this morning.

The largest issue, Harrah's Chairman Phil Satre said, was "our old nemesis" -- poor table game hold at the Rio. But Satre also warned that a slowing national economy was starting to take a bite out of earnings.

"The good news is the impact (from the slowdown) to our overall earnings was slight," Satre said. "The bad news is, we don't have any visibility as to when this will turn."

Extremely heavy selling followed Harrah's warning -- this morning, Harrah's traded at $29.45, down $6.34. That's a decline of nearly 18 percent.

But investors also appeared spooked that economic issues would begin hurting other casino companies as well -- virtually every major casino stock was down at least 4 percent this morning. Park Place Entertainment Corp. retreated $1.14 to $10.80, MGM MIRAGE was off $1.88 to $28.90 and Mandalay Resort Group was down $1.42 to $26.11.

"It's set off a warning, and the concern is no one knows whether this is the beginning of a one-year downturn, or if this is just an anomaly," said gaming analyst Dennis Forst of McDonald & Co. Investments. "Uncertainty is something that concerns investors more than anything else, and I think it's justified that the group is under pressure today. The next month is going to be a very stressful month for gaming investors."

CS First Boston gaming analyst Brian Egger, however, believed investors were overreacting.

"There appears to be some reassessment of the longer-term growth potential of these companies, and that's not necessarily what I'd extrapolate from this development," Egger said. "Given that this is just one data point ... that may be a bit premature."

One issue that was specific to Harrah's was poor table-game hold at the Rio, which took about 4 cents to 5 cents per share off the company's earnings for the quarter, more than any other factor. This came despite strong improvements in table game play, slot win, hotel business, restaurants and entertainment.

"When one steps back and looks at the income statement at the Rio, you see a business that performs well ... but manages to win or lose a substantial amount of that cash flow (from other businesses) at the table games," said Harrah's President Gary Loveman. "We've been on the losing end of that for quite some time."

The Rio had shown signs of life during the first quarter, when it posted cash flow of $22.7 million, a 220 percent increase over the year-ago period. That had been encouraging news for the property, which posted just $29.2 million in cash flow during 2000, down from $97.9 million in 1999.

But the Rio's lapse was only part of the reason for the missed quarter. Harrah's also blamed "accelerating weakness ... in non-tracked walk-in (customers), business stemming from the nation's economic slowdown."

Worst hit were Harrah's properties in Northern Nevada, which saw a double-digit percentage decline in retail business from Northern California. This weakness was partially offset by strong performances at Harrah's properties in St. Louis, Atlantic City, Shreveport, La., Las Vegas and Laughlin.

"The issue we face overall is that our retail (non-tracked) business is off virtually everywhere, and it's especially acute in Northern Nevada," Loveman said. "I'm convinced the markets where we performed O.K. in the second quarter would have been even better if our retail business had not deteriorated."

Harrah's also said it is absorbing a $5.5 million pre-tax charge to write off its investment in Zoho Corp., a Silicon Valley e-commerce company focused on the procurement of goods for the hotel industry. The company also posted a $2.8 million pre-tax charge from "an initiative to reduce the income-statement volatility of a deferred compensation program."