Park Place stock down on earnings shortfall

By Liz Benston (contact)

Thursday, Oct. 3, 2002 | 11:12 a.m.

The stock of Park Place Entertainment Corp. fell 10 percent this morning on news that the company's third-quarter earnings would fall short of earlier estimates, primarily due to poor results at its Caesars Palace resort in Las Vegas.

Including losses related to the termination of an energy contract with bankrupt Enron Corp. and damage from tropical storm Isidore, earnings will bottom at 12 to 14 cents per share, the Las Vegas company said.

Based on the 306 million shares outstanding in the second quarter, that would result in earnings of about $37 million to about $43 million.

That's below earlier Park Place estimates of 17 to 19 cents per share. It also falls below expectations by Wall Street analysts that the world's largest casino company would earn 16 to 20 cents per share, or an average of 19 cents.

Excluding the effects of Enron and Isidore, the company said it expects to earn 14 to 16 cents per share.

"Abnormally low" table hold at Caesars Palace hurt earnings, as did disruption caused by construction projects, which led to a lower volume of slot machine play, the company said in a statement.

Park Place spokesman Robert Stewart declined to comment beyond today's statement. The company will release complete third quarter results Oct. 24.

The lowered expectations are primarily due to some property-specific problems rather than endemic, companywide issues, said Jason Ader, a casino industry analyst for Bear, Stearns & Co.

"The issues are really at Caesars and the Las Vegas Hilton," Ader said.

Otherwise, Caesars Indiana riverboat casino did well as a result of the ability to permanently dock the vessel under new Indiana regulations eliminating cruising requirements, and results in Atlantic City were in line with expectations, he said.

"The results were kind of a mixed bag for them," added Andrew Zarnett, an analyst with Deutsche Bank Securities.

On the one hand, the drop at Caesars Palace was relatively predictable given the significant disruption caused by the company's construction projects, Zarnett said.

By contrast, he said, "bad luck is always difficult to predict."

"Sometimes you win and sometimes you lose when you're dealing with high-end players."

On the upside, the company's Paris Las Vegas and Bally's Las Vegas properties performed in line with expectations, which also coincides with the expectations of other major Strip properties, he said.

Caesars Palace is considered Park Place's crown jewel, drawing more high-roller business than its other casinos. Along with the potential for greater revenues come greater risks when players win at the tables, casino operators say.

Companywide, results during the first two months of the quarter were generally consistent with expectations, with August improving from July, according to the Park Place statement.

"Caesars Palace was the exception," the statement said.

In September, each region was somewhat below expectations, especially in the West and mainly at Caesars Palace.

The voluntary termination of the Enron contract resulted in a one-time charge of about $7.5 million. Future energy cost savings are expected to more than offset the loss, the company said. Tropical storm Isidore caused an estimated $2.5 million in damage to its Gulf Coast properties, which will be charged against the company's insurance deductible.

The company has several construction projects pending at Caesars Palace. The most significant is a replica of a Roman colosseum to debut in March with an entertainment spectacle featuring recording artist Celine Dion. That project, adjacent to the casino, created a disruption that prompted the company to lay off casino workers and shut down some games a few months ago.

Nearby, Caesars expects to open a new restaurant by celebrity chef Bradley Ogden in March and is also reconstructing a food court area. An underground parking garage project has disrupted access from the Strip, observers add. Longer term, Park Place and Simon Property Group have said they expect to add about 200,000 square feet of retail space to their popular Forum Shops at Caesars mall by 2004.

Shares of Park Place dropped about 80 cents, to $7.34, this morning.

Park Place Chief Executive Tom Gallagher has previously argued that the financial markets have consistently undervalued the company. The lower share price also is a function of the greater number of shares outstanding, a function of the relatively recent genesis of Park Place as a combination of several large companies, he has said.

Bear Stearns' Ader said he has advised his clients this morning to buy up shares.

"This is still a company with great real estate. Even though they have their issues, it's a classic value stock."

Ader said he values the company's assets at around $10 to $12 a share.