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December 19, 2014

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DAILY MEMO: GAMING:

Station bears brunt of locals market slump

Reliance on Vegas customers, cannibalizing of its own customers and increased competition are cited as factors in profit falloff

Beyond the Sun

Gaming companies and especially locals casinos, with their hard-core gamblers, were once thought to be resistant to economic downturns.

But this downturn, with its deep housing slump, has proven that theory wrong and made an example out of Station Casinos, as the locals gaming giant’s profits have fallen more dramatically than those of its peers on the Strip.

“The effect of this recession on the Las Vegas local customer has been worse than on the average gaming customer,” bond analyst Kimberly Noland of Gimme Credit Publications said in a report this month.

Station’s numbers have steadily worsened since early 2007.

Revenue, up 27 percent in the first quarter of 2007, was flat by the fourth quarter. This year, it was down 5 percent in the first quarter, followed by a 7 percent decline in the second quarter.

The profit picture has been worse.

Even before the downturn, the company’s casinos such as Green Valley Ranch and Sunset Station were cannibalizing business from one another. That trend is hardly new, but it has worsened, analysts say, with the proliferation of suburban casinos.

And competitive pressures are mounting: the Eastside Cannery opens on the Boulder Strip this week and M Resort opens in March on the South Strip.

None of that helps Station’s $1 billion-plus Red Rock Resort, which was the most expensive off-Strip casino in history when it opened in April 2006. A hotel expansion opened last year.

Revenue at the company’s Green Valley Ranch — the only Station property that reports its financial results — was down 11 percent from January through June compared with a year ago and earnings, before certain items, were down 17 percent. (Two of Station’s casinos, Green Valley Ranch and Aliante Station, are co-owned by the Greenspun family, which also owns the Las Vegas Sun.)

Analyst Matthew Jacob of Majestic Research says Michael Gaughan’s South Point on Las Vegas Boulevard south of the Strip has stolen market share from Green Valley Ranch and Red Rock Resort has lost market share to other competitors.

Though Red Rock is the newest suburban casino in Las Vegas, Boulder Station and Boyd Gaming Corp.’s Sam’s Town and Orleans have done better in terms of attracting their share of gamblers, when results are adjusted for casino size, Jacob said in a June 11 report to investors.

Station controls an estimated 42 percent of the Las Vegas locals market, which was flat compared with a year ago, Jacob said. By contrast, Boyd’s share of the market is about 28 percent, also flat from a year ago. But Station’s gambling volume, adjusted for the casino size, has fallen slightly over the past year, Jacob says.

Station Casinos went private last year, executives say, to escape the pressure from Wall Street to meet quarterly profit goals. Their company, they say, is managed for growth over the long term.

While its equity is privately held, Station’s bonds aren’t: One set of bonds that traded at more than full value in May 2007, now trade at less than 68 cents on the dollar. A subordinate set of bonds that formerly traded at 94 cents on the dollar now trades at less than 46 cents on the dollar. Those bonds now carry a 22 percent interest rate — a rate more often associated with risky startups.

Because Station’s business is so heavily invested in Las Vegas, the company’s performance will tend to track the health of Las Vegas over the long term. With a dominant share of the market, the company will disproportionately benefit from an economic rebound.

Profits didn’t fall as much as expected in the second quarter because the company has cut costs, bond analyst Dennis Farrell of Wachovia Capital Markets noted.

The company probably won’t get into too much trouble with lenders because it has plenty of vacant land that could be sold to raise cash, Farrell said.

That acreage doesn’t generate cash for the company but has long-term value to investors in a market with a limited number of available casino sites.

In the meantime, Station is feeling the brunt of what Jacob calls a “two-pronged problem” — that of increased competition and slowing demand.

“It’s not going to get better anytime soon, given these two forces at work,” he said.

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