Station beats its own estimates for quarter

David Strow

Tuesday, April 16, 2002 | 11:11 a.m.

Station Casinos Inc. beat its own earnings estimates this morning, reporting a 10 percent increase in cash flow and net income for the quarter ended March 31.

The Las Vegas-based locals' casino giant reported cash flow prior to one-time charges of $63.9 million, up 10 percent over the year-ago quarter. Net income before one-time charges rose 10.5 percent to $12.6 million, or 21 cents per share.

These figures came in significantly ahead of the estimates provided by Station on March 20, when it told investors to expect earnings of 16 cents to 18 cents per share, and cash flow of $59 million to $61 million.

"We had a tremendous March, which helped this quarter quite a bit," said Frank Fertitta III, chairman and chief executive of Station.

Station took a one-time non-cash charge of $13.3 million at the Fiesta Rancho, designed to reduce the property's book value to more accurately reflect its performance and market value. After that charge, Station posted a net loss of $257,000, or less than 1 cent per share. Station also booked unspecified "insurance proceeds" during the quarter, increasing its actual cash flow to $64.6 million.

The company also noted that it sold a land parcel for $7.2 million during the quarter, but didn't say where the parcel was located.

Station's stock rose to a 52-week high of $18.80 in early trading today, but gave back these gains later. It traded at $18.11 by midday, down 4 cents.

Station's strong quarter was attributable to two factors. The new Green Valley Ranch Station Casino played a role, but a far bigger factor appeared to be aggressive cost control. Company officials said the cost savings came from removing expenses that "don't impact the customer experience." For example, the company achieved synergies in purchasing and advertising between the company's eight casinos.

"We've focused very hard on getting all the efficiencies and economies of scale out of our market position that we can," Fertitta said.

During the quarter, Station's revenues fell 2 percent to $205 million, despite the presence of the new Henderson casino. But expenses fell 5.5 percent to $158.9 million, and Station was able to increase its cash flow profit margin from 32 percent of revenues in the year-ago quarter to 35 percent in this quarter.

In its first full quarter of operations, Green Valley Ranch posted cash flow of $10.6 million and revenues of $30.3 million, which Station called the strongest debut for any new property in its history. Station owns 50 percent of this property, and received $3.8 million in profits and management fees from Green Valley Ranch in the first quarter.

Station's partner in the resort is a company controlled by the Greenspun family, owner of the Las Vegas Sun.

Green Valley Ranch was the only property where Station reported specific results. As a group, Station's other seven properties -- Palace, Boulder, Texas, Sunset, Fiesta Rancho, Fiesta Henderson and Santa Fe -- reported $67.7 million in cash flow, a 7 percent increase. Revenues at the seven casinos fell 1 percent to $195 million.

"The fact that revenues for our major Las Vegas operations stayed relatively flat (after Green Valley Ranch opened) confirms our belief that adding quality gaming product in fast-growing segments of the Las Vegas Valley can result in an expansion of the market," said Station Chief Financial Officer Glenn Christenson.

In the second quarter, Station told investors to expect cash flow of $57 million to $59 million, and earnings of 13 cents to 15 cents per share. This would be even with the $58.5 million in cash flow Station reported for the second quarter of 2001.

For the year, Station now expects cash flow of $235 million to $240 million, and earnings of 59 cents to 64 cents per share.

Given the company's cost-cutting -- and the fact that the company beat its own first-quarter estimates -- some analysts wondered whether the company was being too conservative. Christenson responded that the company still faces a number of challenges, including high unemployment among its customer base, higher energy costs and lower per-visit spending by its customers.

"Guiding toward this (estimate) is reasonable until we see more tangible evidence of recovery in the Las Vegas economy," Christenson said. "We are optimistic about 2002, but the local market has not fully recovered. The bigger question is how quickly the local economy recovers, not if it will recover."

Still, some analysts believed more upside remains.

"We believe there could be some additional upside to our numbers, as the company's guidance likely remains conservative," wrote Jason Ader, gaming analyst with Bear Stearns.

Improving business trends and the end of road construction near Palace Station should help the company meet current estimates, Ader wrote.

Still, not everyone is convinced Station's strong quarter makes the stock worth buying. Robin Farley, gaming analyst at UBS Warburg, noted that the stock now trades at 9.3 times its expected cash flow in 2002 -- well ahead of its historical multiple of 7 times cash flow.

"In November, consensus expectations were for 70 cents in EPS and the stock was at $8," Farley wrote. "Now, with earnings guidance 10 percent below those levels, the stock is up 125 percent."

Farley reiterated a hold rating.