Higher energy costs hurt Vegas Tropicana

David Strow

Wednesday, July 11, 2001 | 10:47 a.m.

Five days after Harrah's Entertainment Inc. shook up gaming stocks with an earnings warning, Aztar Corp. beat analyst expectations for its second quarter ending June 28.

This came despite news that higher energy costs are cutting into the profits of Aztar's Las Vegas Tropicana hotel-casino.

The Phoenix-based casino operator reported net income of $16 million, or 40 cents per share. Analysts had expected Aztar to earn 35 cents per share.

Aztar's net income was down 28 percent from the year-ago quarter. However, the year-ago quarter was boosted by a one-time tax benefit of $7.5 million; when that benefit is factored out, Aztar's net income rose 7.4 percent.

Aztar stock rose 95 cents this morning to $12.66.

Revenues declined 4.6 percent to $210.9 million, as revenues declined at each of Aztar's five casino properties. But cash flow increased 1.3 percent to $52.7 million, as the company undertook aggressive cost-control measures -- particularly in marketing -- in the face of a weakening economy. Aztar officials conceded that these cuts probably contributed to the decline in revenues, but said the focus needed to be building the bottom line.

"In our industry, we've come a long way from understanding where marketing dollars should be spent," said Aztar Chairman and Chief Executive Paul Rubeli. "In my opinion, they should not be spent on things that do not create fun for our customers. Blind spending just to build market share does not necessarily create fun."

Rubeli argued casino industry revenues aren't challenged by the slowing economy as much as by the decline of the stock market, which is hitting the portfolios of older customers.

"That's the most important segment of our industry," Rubeli said. "I conclude that the economic slowdown is important, but I suspect where the stock market goes in the next 12 months is going to be more important."

Four of Aztar's five properties -- Tropicana Atlantic City, Ramada Express Laughlin, Casino Aztar Evansville (Ind.) and Casino Aztar Caruthersville (Mo.) -- showed increased profit margins during the quarter. The sole exception was the Tropicana on the Las Vegas Strip.

At the Las Vegas Tropicana, revenue declined 3 percent to $39.7 million, and cash flow fell 8 percent to $8 million. This decrease came despite the fact that the Tropicana's hotel was virtually sold out during the entire quarter.

Rubeli attributed the cash flow decline almost entirely to soaring energy costs in Nevada, saying they had cost the company an additional $500,000 during the quarter. To counter this, Rubeli said the Tropicana introduced an room energy surcharge on July 1.

"We were coming off one heck of a quarter last year (at the Tropicana)," Rubeli said. "It was the highest in Tropicana history. I'm happy with the $8 million."

Rubeli said the company isn't seeing any evidence of a slowdown in the Las Vegas market, and told analysts the Tropicana's business looks strong into August.

The Tropicana Atlantic City was the strong performer for Aztar during the quarter, as cash flow rose 7.5 percent to $33 million. The company's Missouri property reported $1 million in cash flow, up 25 percent, while cash flow in Laughlin was unchanged at $6 million despite a 5 percent revenue decrease. The Indiana property reported cash flow declined 8 percent to $8 million, though the property's profit margins improved.

Aztar's cost-control efforts were met by approval from some corners of Wall Street.

"We continue to believe Aztar is trading at a significant discount to its current value," wrote Bear Stearns gaming analyst Jason Ader in a research note this morning. Ader noted the shares were trading at five times 2002 cash flow estimates, when they should be trading at 5.5 times to 6 times those estimates.

"As such, we believe shares of Aztar could easily see 20 percent upside from current levels," Ader said.

Meanwhile, Las Vegas-based Innovative Gaming Corp. of America also pre-announced a profitable quarter this morning.

The small video slot and video table game maker announced net income of 1 cent per share for the quarter ended June 30, compared to a 3 cent per share loss in the year-ago quarter. Total net income was not provided.

Revenues for the quarter increased 98 percent to $4.7 million. The company reported operating income of $507,000, up from an operating loss of $137,000.

IGCA said it is focusing more of its efforts on placing machines in casinos on a revenue-sharing basis, rather than outright sales, to increase the company's recurring revenue stream. Toward that end, the company said it placed $585,000 in equipment during the quarter.

IGCA stock fell 16 cents this morning to $1.32.