Analysts adjust views on LV-area casino operators

David Strow

Wednesday, June 27, 2001 | 11:04 a.m.

CIBC World Markets hiked its earnings outlook for Ameristar Casinos Inc. of Las Vegas, apparently touching off a powerful rally in the company's shares.

CIBC World Markets gaming analyst William Schmitt raised quarterly and annual earnings estimates for Ameristar, based on strong results from the two Missouri riverboats Ameristar recently purchased from Station Casinos Inc.

Schmitt raised his second quarter estimate from 35 cents to 39 cents per share, or $1.05 million in net income. The 2001 estimate was raised from $1.43 to $1.55 per share ($4.2 million in net income), and the 2002 estimate was increased from $1.55 to $1.64 per share ($4.4 million in net income).

Schmitt estimated Ameristar would produce $38.1 million in second quarter cash flow, $151.2 million in 2001 cash flow, and $165.8 million in 2002 cash flow.

"Given the low hanging fruit in Missouri, as well as the recent property enhancements in both Vicksburg (Miss.) and Council Bluffs (Iowa), we believe further improvements (in earnings estimates) are likely," Schmitt said. Schmitt noted that Ameristar's daily win per slot machine was still well below the market averages in St. Louis and Kansas City, despite the strong quality of the Ameristar casinos in those markets.

Schmitt revised his 12-month price target from $11 to $14. Ameristar shares promptly shattered this target on June 18, the date of the report's release, closing that day up 14 percent at $14.50. The shares have held above the $14 level, closing at $17 Tuesday.

Earlier in the month, Schmitt lowered his earnings estimates for Station Casinos Inc. for the quarter ending June 30. The cash flow estimate was lowered $1.9 million to $63.4 million, while estimated net income was lowered from 21 to 19 cents per share, or about $11.5 million in net income.

"Our new estimates reflect ongoing disruption from road construction in front of Palace Station, increased competition and aggressive marketing from a competing facility (Sam's Town) near Boulder and Sunset Stations, and restrained demand due to high energy prices," Schmitt wrote.

Despite this adjustment, Schmitt reiterated a buy rating on the stock and increased his 12-month price target from $17 to $18. The new price target was based on the use of 2002 earnings estimates, rather than 2001.

Separately, Merrill Lynch lowered its earnings expectations for Park Place Entertainment Corp. Gaming analyst David Anders cited weaker than expected results at Park Place's Atlantic City properties, combined with a "more conservative outlook" for the Las Vegas Hilton.

Anders lowered his second quarter earnings outlook by 2 cents, or slightly under $6 million in net income, to 17 cents per share. The 2001 outlook was lowered by the same amount to 60 cents per share, or $178 million in net income.

"Although we believe our estimates for the remainder of the year remain reasonable, any sustained softness in Atlantic City or a weakening in the Las Vegas market could force us to further re-evaluate our forecast," Anders wrote.

Anders raised his 2002 earnings estimate, however, to 90 cents per share, the equivalent of $267 million in net income for the year. That estimate is up from his earlier estimate by 17 cents per share. This change comes as a result of changes to accounting standards; effective Jan. 1, 2002, all public companies will be able to halt the amortization of goodwill expenses on their balance sheets.

Park Place carries more goodwill on its balance sheet than any other gaming company, due to its buyouts of Bally's, Grand and Caesars World, Anders said.

Anders maintained an "accumulate" rating on Park Place.

Separately, Merrill Lynch upped its earnings estimates for Harrah's Entertainment Inc. and Argosy Gaming Co. last week, citing pending acquisitions by both companies that should boost earnings.

Anders raised his 2002 earnings estimate for Harrah's from $2.50 to $2.79 per share , equivalent to $327 million in net income for the year. Anders raised his free cash flow estimate from $3.94 to $4.22 per share, or $495 million.

The new estimate partly reflects expected benefits from Harrah's plan to acquire Harveys Casino Resorts of Lake Tahoe for $675 million. Anders is assuming the company will see $10 million in savings and synergies in 2002 from acquiring Harveys, but believes this will eventually reach $25 million per year.

A larger factor in 2002, Anders notes, is the end of goodwill amortization. That should add 18 cents per share to Harrah's 2002 earnings, Anders said, or $21 million in net income.

Anders repeated his "buy" rating on the stock and a 12-month price target of $45, a 19 percent premium over current levels.

Anders also raised his 2002 earnings estimate from $2.18 to $2.68 per share, or $78.2 million in 2002 net income, for Argosy. He estimated the company would produce $3.77 per share in free cash flow, or $110 million, in 2002.

The chief reason for this upgrade was Argosy's pending $465 million purchase of the Empress Joliet riverboat casino in Joliet, Ill., from Horseshoe Gaming. This should boost 2002 earnings by 35 cents per share; an additional 15 cents should be added by halting the amortization of goodwill.

"After integrating and expanding the Empress Joliet property, we believe Argosy's (cash flow) could approach $300 million," Anders wrote. "With this level of cash flow, we believe that the company will be able to pursue larger projects in major gaming markets."

This could include Las Vegas at some point over the next three to five years, Anders said.

"As gaming companies grow and mature, at some point Atlantic City or Las Vegas is a logical step," Anders said.

Argosy currently operates riverboats near Cincinnati, St. Louis, Kansas City, Baton Rouge, La., and Sioux City, Iowa. Anders reiterated a buy rating on the stock, and a 12-month price target of $33, a 29 percent premium over current levels.

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