Station profit declines, but beats expectations

David Strow

Tuesday, Jan. 29, 2002 | 11:16 a.m.

Station Casinos Inc. posted a significant decline in earnings for the fourth quarter ending Dec. 31, but was still able to come in well ahead of analyst expectations.

Station posted earnings of $7.3 million, or 13 cents per share, before one-time charges. This was down 34 percent from earnings before one-time charges of $11.1 million, or 18 cents per share, in the year-ago quarter; however, analysts had expected the company to report earnings of 6 cents per share.

As a result, Station stock rose 34 cents, or 2.5 percent, to $14 in morning trading today.

The company's fourth-quarter earnings included $4.4 million in pre-opening expenses from the $300 million Green Valley Ranch Station Casino, opened by Station on Dec. 18. These charges reduced Station's net income to $4.5 million, or 8 cents per share; in the year-ago quarter, Station's net income after non-recurring charges was $34.9 million, or 55 cents per diluted share.

Revenues were off 16 percent to $204.4 million, while cash flow fell 9 percent to $54.3 million.

"Clearly, the results indicate the strength in the (Las Vegas) locals market," said Andrew Zarnett, gaming analyst at Deutsche Banc Alex. Brown. "While their results weren't as robust as some of the other locals markets in the Midwest, and performed relatively strong, given the dramatic effects Sept. 11 had on the tourism industry in Las Vegas."

Zarnett also noted it appeared the company had "worked very hard to reduce costs, to keep margins strong in the advent of the difficult times."

"That helped mitigate against a more severe decline in cash flow," he said.

Analyst Jason Ader of Bear Stearns was also cautiously optimistic following the Station report, raising his 2002 earnings estimate from 35 cents to 40 cents per share, and his cash flow estimate from $214 million to $220 million. He based these increases on an expectation that "trends will continue to improve throughout 2002."

"As we expect no new major properties openings in the locals market for several years, and no major capital expansions from Station, we believe the company has reached an inflection point for the supply/demand dynamic, although we believe that 2002 could still be a challenging year," Ader wrote.

Station's portfolio changed drastically between the two quarters. It sold off two casinos in Missouri in December 2000, acquired the Santa Fe in October 2000, bought the Fiesta and Reserve (now Fiesta Henderson) in January 2001, and opened Green Valley Ranch in December 2001.

The four properties that remained with Station in both quarters -- Palace, Texas, Boulder and Sunset Stations -- reported $44.1 million in cash flow, down 7 percent from the year-ago period. This was the result of the post-Sept. 11 economic slowdown, said Chief Financial Officer Glenn Christenson, but the properties still fared slightly better than expected.

"While visitor volume from our local customers has rebounded substantially, the spend(ing) per visit is still lower than we have seen in recent years," Christenson said.

The three acquired properties produced an additional $15 million in cash flow, $2 million ahead of expectations. This more than offset the $13.5 million in cash flow that the Missouri casinos had produced in the year-ago quarter.

Finally, Green Valley Ranch was able to produce $2.5 million in cash flow in its first 14 days of operation. Station's take as the casino's 50 percent owner and manager was $1.4 million, which included management fees. Station's partner in the resort is the Greenspun family, owner of the Las Vegas Sun.

"While it was early in the property's history, that was still a very strong number," Zarnett said.

Investors had been told to expect that any new profits from Green Valley Ranch would be offset by lost business from Sunset Station, at least during the first year. Christenson said this cannibalization was "about what we expected" during the last two weeks of December.

"Having said that, the more we watch these two properties, the more confident we are that they will continue to grow the market in Green Valley," Christenson said.

Station told investors to expect earnings of 9 cents per share in the quarter ending March 31 and cash flow of $54 million; for 2002, the company now expects to earn 40 cents per share on $220 million in cash flow. These new estimates are on the "upper end of guidance given previously," Christenson said.

"(The new estimates are) due to our current operating levels and our optimism about the continuing recovery in the local economy during 2002," Christenson said. "However, we believe it is premature to increase our guidance until we have more visibility with respect to how quickly the recovery occurs."