Buyback may hike price of Station stock

David Strow

Friday, July 27, 2001 | 11:12 a.m.

Las Vegas locals' gambling leader Station Casinos Inc. today announced plans to buy back as much as 17 percent of its own stock -- two days after announcing disappointing earnings.

The move could be significant for Station and the Las Vegas economy, as it is indicative of a shift in Station's investment philosophy.

Station bought three competing casinos in the last year, and had been considering building new casinos on land it holds across the Las Vegas Valley. It now has seven big casinos in the area -- Palace, Texas, Boulder, Sunset, Santa Fe, Fiesta and Reserve -- and 9,600 employees, along with an estimated 50 percent share of the Las Vegas locals' gambling market.

But Station hasn't seen the financial boost everyone expected from buying the Reserve, Santa Fe and Fiesta, and its four original properties have seen tough competition from new properties and expansions throughout the area. As a result, Station is signaling it plans to focus far more on shoring up its balance sheet instead of immediately building more new casinos or buying more competitors.

On Wednesday Station revealed plans to sell excess land. Today's announcement indicates money from such sales as well as future profits will be used to pay down debt and buy back stock as opposed to expansion of Station's Las Vegas gambling operations.

Station today said its board has authorized the company to buy up to 10 million shares of Station stock, both on the open market and in negotiated transactions with shareholders. Station currently has 57.8 million shares outstanding.

Station had 2.7 million shares of stock remaining under a previous repurchase authorization. Today's move is a "replenishing of this basket," said Chief Financial Officer Glenn Christenson.

"We believe in the company, we believe a good use of free cash flow is to reinvest in the company," Christenson said.

But he denied the announcement was timed to help reverse the slide in Station's stock of the past few days -- or to shore up the erosion of analyst confidence seen after a disappointing earnings report Wednesday. Analysts from three firms -- Bear Stearns, CIBC World Markets and Gerard Klauer Mattison -- downgraded Station Thursday.

"This isn't some sort of master plan ... it's part of a longer-term goal to reduce the number of shares outstanding," Christenson said.

Investors didn't take much interest in the announcement -- this morning, Station traded at $14, unchanged. Over the past two days, it has declined more than 6 percent.

"Many times when stocks come under pressure management tries to signal the market that its stock is attractively valued," said David Anders, gaming analyst with Merrill Lynch. "Authorizing share repurchases it one way to do that."

When a company repurchases its own stock, it can boost stock price by creating demand for its shares. The company is also reducing the number of shares outstanding -- and therefore, any earnings reported are divided by less shares. That can also boost share price, since earnings per share is a key measurement in valuing a stock.

But first the company actually has to buy the shares, Anders said.

"Many times, not Station but in general, we've seen authorizations that never led to the actual repurchase of shares," Anders said. "(Today's authorization announcement) is a very slight positive, but not until we actually see the share repurchases, and management is willing to put their money where their mouth is, will we get excited."

Typically a company views share repurchases as an investment decision. The potential returns on an investment in a company's stock is weighed against other investments, such as acquisitions or building new properties.

In less than a year Station has acquired the Santa Fe, Reserve and Fiesta in the Las Vegas area, and said Wednesday that they haven't performed up to expectations. A particularly tough market in North Las Vegas prompted Station to call off plans to develop a third casino there.

Station now appears to be leaning toward investments other than building or buying new casinos.

The only new project currently going forward in the valley is the $300 million Green Valley Ranch Station Casino, a 50-50 joint venture with the Greenspun family of Las Vegas. (The Greenspun family owns the Las Vegas Sun.) The new property is set to open at Green Valley Parkway and the Beltway in Henderson in December.

But even that isn't seen as an entirely positive move for Station, since some believe it will "cannibalize" players and business from other Station properties, particularly Sunset Station. Station executives told analysts Wednesday that some cannibalization was expected from Green Valley Ranch, but said they couldn't currently estimate how severe it would be. They also said any cannibalization should be offset by management fees received from the casino.

There are concerns, however, the effect will be more severe. That's because business will be coming away from properties owned entirely by Station to a property where Station must split profits with a partner.

"We believe this project should benefit from its location to generate strong initial revenue and (cash flow) ... however, we believe a meaningful portion of the revenue will come at the expense of Station's wholly-owned Sunset Station, and, to a lesser extent, should also impact operations at the Reserve," CIBC World Markets gaming analyst William Schmitt wrote in a Thursday note. Schmitt said he expected Sunset's cash flow to fall 14 percent in 2002 as a result of Green Valley Ranch.

Anders is also cautious on Station, and has had a "neutral" rating on Station for a year.

"What we're looking for is to make sure (projected) growth rates at the acquired properties can be obtained," Anders said.

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