Station Casinos profit plunges; Mandalay will beat forecast

David Strow

Tuesday, Nov. 6, 2001 | 10:55 a.m.

Station Casinos Inc. reported a 70 percent decline in third-quarter net income this morning, an outcome the company blamed in large part on the post-Sept. 11 economic and tourism slowdown.

Mandalay Resort Group also warned this morning its earnings were down for the third quarter, though not nearly as much as Strip casino resort operators MGM MIRAGE and Park Place Entertainment Corp. And it will handily beat analyst expectations for the quarter, news that caused its stock to soar more than 13 percent this morning.

Station reported net income of $4.6 million, or 8 cents per share, for the quarter ended Sept. 30. In the year-ago period, the company earned $15.6 million, or 25 cents per share.

However, Station's earnings during the quarter were boosted by one-time gains from the sale of its Southwest Gaming slot route operation and the sale of real estate. Excluding one-time charges, Station reported net income of $3.4 million, or 6 cents per share.

This missed analyst expectations of 11 cents per share. Revenues fell 15 percent to $212.4 million, while cash flow was down 31 percent to $47.6 million.

A straight comparison between the quarters is difficult. Since the third quarter of 2000, Station has sold casinos near St. Louis and Kansas City, Mo., and acquired the Santa Fe, the Fiesta and the Reserve in the Las Vegas area. The Missouri properties produced $24.2 million in cash flow during the third quarter of 2000 that Station didn't receive in 2001; however, this was offset by $15.9 million in new cash flow from the three las Vegas-area casinos.

At the four properties Station held during both quarters -- Palace, Boulder, Texas and Sunset Station -- revenues fell 3 percent, while cash flow dropped 21 percent.

Station officials blamed a variety of factors that had proved troublesome in previous quarters: competition for Texas Station from the Suncoast, road construction-related disruption at Palace Station, slower-than-expected integration of the three new Las Vegas-area casinos, and a slowing economy.

After a soft July and August, September started out fairly strong, said Station Chief Financial Officer Glenn Christenson. Then Sept. 11 came.

"Our biggest competitor that week was CNN," Christenson said.

Then came the effect of layoffs along the Strip. Though Station itself hasn't laid off anyone, many of the company's customers do work in the gaming industry, so layoffs on the Strip had a ripple effect.

"The Las Vegas economy is still strong, relative to most communities around the country," Christenson said. "Increasing energy costs, decreasing consumer confidence and the (declining) stock market effect on net worth are having an effect on our business. As Strip occupancy and visitor volumes increase, so will re-hiring (by Strip casinos). Many of those (rehired employees) will be Station customers."

Though business looked encouraging in October, Station executives were hesitant to boost expectations for next year. The company told analysts in a morning conference call to expect cash flow of $210 million to $220 million in 2002, unchanged from this year. That estimate includes cash flow from Green Valley Ranch Station Casino, of which Station owns 50 percent; that casino is projected to open in Henderson in December. It also assumes that construction outside Palace Station will be complete in early 2002.

"It's tough to give guidance of any kind," said Station Chief Executive Frank Fertitta III. "There's a lot of uncertainty out there about what '02 is going to look like, what it's going to be like."

The disappointing earnings report and outlook prompted one analyst -- UBS Warburg gaming analyst Robin Farley -- to reduce Station stock from "buy" to "hold" this morning. Her new price target of $8 is actually below current levels.

"We don't see a positive catalyst in the next 12 months to drive significant cash flow growth beyond our new estimates," Farley wrote.

Bear Stearns gaming analyst Jason Ader, more bullish on Station's long-term prospects, reiterated his "attractive" rating in a research note this morning. But he warned investors not to expect much from the stock in the coming months.

"While we are still long-term believers in the Station story, especially given the favorable long-term supply/demand dynamics in the market, we believe shares could remain in a tight trading range until earnings visibility improves and there is some sign of stabilization in the Southern Nevada economy, as well as the competitive environment in the locals market," Ader wrote.

"We would recommend shares of Station for investors with a longer-term investment horizon."

Meanwhile Mandalay Resort Group told investors to expect net income to come in between 32 cents and 34 cents per share for the quarter ending Oct. 31. That is down from the 38 cents per share Mandalay earned in the year-ago quarter, but it is far above the 7 cents per share analysts expected Mandalay to earn during the quarter.

Mandalay said cash flow from its Strip casinos was down 10 percent over the year-ago quarter. "Without the Sept. 11 tragedy ... both earnings and operating cash flow for the company would have compared favorably to the prior year's quarter, including performance of its Las Vegas resorts."

Mandalay stock shot up $2.20 to $19.25 this morning.