Station stock surges on financial report

David Strow

Wednesday, March 20, 2002 | 11:11 a.m.

Station Casinos Inc.'s shares surged more than 14 percent this morning, after the company announced it would significantly beat Wall Street's financial expectations for the quarter ending March 31.

Analysts had expected the Las Vegas-based locals casino operator to report first quarter earnings of 10 cents per share. Instead, Station said it expects to report earnings of 16 cents to 18 cents per share. Station earned 19 cents per share in the first quarter of 2001.

Cash flow will come in between $59 million and $61 million, Station said, ahead of the company's prior estimates of $54 million -- and ahead of the $58.8 million in cash flow Station posted in the year-ago quarter.

Station Chief Financial Officer Glenn Christenson attributed the gains to "technological initiatives implemented last year and an improved, although still sluggish, Las Vegas economy."

"We've been pleased with the resiliency in the Las Vegas locals market," Christenson said.

But cost-cutting efforts played the biggest role, Christenson said. "We're taking costs out that do not impact the customer experience," he said.

It appears part of the gain was due to the Henderson market. Any gains from the $300 million Green Valley Ranch Station Casino, opened in mid-December, had been expected to be offset by lost business at Sunset Station.

In the early part of 2001, however, "Green Valley Ranch has grown the market, and Sunset is not being impacted quite to the extent we previously projected," Christenson said.

Christenson estimated the property would produce $10 million in cash flow during the quarter; Station's share of profits from the property will be between $3.5 million and $4 million, he said. Station must split the profits of Green Valley Ranch with its 50 percent partner in the property, the Greenspun family of Las Vegas (owner of the Las Vegas Sun).

Christenson added, however, that Station isn't backing off its earlier expectations of cannibalization at Sunset. "This is still a new property, and we're not ready to modify our initial guidance," he said.

Station also increased its guidance for full-year 2002 earnings to 53 cents to 58 cents per share, up from an estimate of 40 cents per share. Cash flow for the year should be between $230 million and $235 million, the company said, up from an estimate of $220 million.

Investors reacted strongly to the news, bidding Station's shares up $2.08 to $16.33 this morning, an increase of nearly 15 percent.

As more than 20 percent of Station's publicly traded stock has been "sold short," Station's stock could continue to go up in the next several days as shorts scramble to cover, said Jason Ader, gaming analyst with Bear Stearns. Short sellers borrow a stock, immediately sell it, then purchase shares for repayment on the open market to "cover" the short at a later date. The investor profits if the stock declines over this period.

The news prompted one analyst, David Anders of Merrill Lynch, to raise his rating on Station's stock from "neutral" to "buy." He set a price target of $17 on the stock, and raised his 2002 earnings estimate from 55 cents to 65 cents per share.

Anders said in a research note that he'd been cautious on Station for two reasons -- the effects that the business slowdown on the Strip has had on Las Vegas residents, and concerns that Green Valley Ranch was stealing away a significant chunk of Sunset Station's business.

"We now feel less concerned about these two issues, as the company's first quarter results reveal," Anders wrote. "In particular, we believe that the improvement in demand for Las Vegas is, and will continue to, translate into improvement in demand for Station's properties, and remain confident that Green Valley will not significantly cannibalize Sunset Station."

Robertson Stephens analyst Harry Curtis already had a "strong buy" rating on the stock, but bumped his price target from $19 to $20 this morning. Ader maintained an "attractive" rating, but raised his target from $16 to $20. Curtis' 2002 earnings estimate rose from 53 cents to 60 cents per share; Ader's went from 49 cents to 63 cents per share.

"Today's upside earnings surprise by Station, in our view, should be followed by other positive announcements," Curtis wrote.

A fourth analyst, William Lerner of Prudential Financial, increased his price target from $12 to $16, and his 2002 earnings estimate from 43 cents to 58 cents per share. But Lerner remains cautious on Station, and repeated his "market perform" rating, largely because the stock's price-to-cash flow ratio is in line with its peer companies.

New competition in the locals market and highway construction in front of Palace Station are still issues that will weigh on Station this year, Lerner cautioned.

"While it is clear the employment market in Vegas is in recovery mode as well, we remain cautious that many of Station's customers are employed at Las Vegas Strip properties -- many of which should recover with improved margins, via lower employee counts or reduced aggregate wages," Lerner wrote. "This could ultimately weigh on Station customers' aggregate gaming budgets and/or volumes."