04 October 2005

Visiting the Casinos

Thought I'd virtually visit some casinos since I have been withholding any trips to AC until I pass the pesky patent bar. And no, I don't touch online poker. I derive pleasure from many aspects of the game. I enjoy the tactile feel of the chips, cards, and felt. I savor the face-to-face competition. You meet such memorable characters at a $6/12 table (and especially at a $2/4). And you can't get cheesesteaks from the White House on the internet.

I would read some articles and re-evaluate my casino stock picks.

I found one piece on thestreet.com on the potential revitalization of Trump's recently bankrupt casinos, and another on the freefall of World Poker Tour's stock. Neither article convinced me to take another look at TRMP or WPTE. Instead, I'm feeling much more confident about all three current picks, BYD, HET, and IGT.

First off, the Trump piece:

The competition has run away from Trump, leaving his collection of ragged casinos littering the boardwalk. And the AC Marina, too. The Marina has three casinos, the Borgata, Harrah's Marina, and an unrenovated dump owned by Trump. I don't see how Trump can catch up, refinanced debt or not.

From 2000 through 2004, total capital spending at Trump's Taj Mahal on the northern end of the Atlantic City boardwalk was $110.3 million, according to figures from the New Jersey Casino Control Commission. Over the same period, capital spending at Aztar's (AZR:NYSE) Tropicana was $374.4 million and $262 million at Harrah's Entertainment's (HET:NYSE) Showboat.

That period also saw the July 2003 grand opening of the Borgata, a $1.1 billion joint venture of Boyd Gaming (BYD:NYSE) and MGM Mirage (MGM:NYSE) that upped the ante in Atlantic City. With 2,000 room and suites, 11 restaurants, 11 boutiques, a spa and theater, the Borgata draws well-heeled overnight visitors interested in a multifaceted experience.

The resort has vaulted to the top of the pack, with net revenue for the first six months of this year outpacing the closest competitor, Bally's Atlantic City, by $50 million. Bally's is owned by Harrah's.
Perry and his lieutenants are working on a capital spending plan, which they hope to share with investors by the end of the year. It could include renovations to casino floors and restaurants, as well as new concept restaurants. They're also working on plans for a new hotel tower at the Taj Mahal, which could add 1,250 rooms, although such a project would take about three years to complete.
After addressing some of its immediate challenges, Trump Entertainment might seek to expand into other markets, Perry said in the second-quarter call. The company's announcement Monday that it had entered into an option to lease an 18-acre plot in Philadelphia shows it's already making plans to do that.

However, even as Trump's new executives roll up their sleeves, competitors aren't standing still. The Borgata is planning a $200 million public-space expansion to be completed next spring and a $325 million 800-room hotel expansion scheduled for the fourth quarter of 2007.
Next year, Caesars plans to open "The Pier," a 500,000 square-foot dining, shopping and entertainment complex on the boardwalk.
As for the stock, which has navigated a range of $12 to $21.50, Noland considers it fully valued around $19 and has encouraged investors to buy it on significant dips. Shares closed at $18 Monday. Noland owns no positions in Trump Entertainment and Gimme Credit does no business with the company.

So as a potential investor, I have to wait three years for the possibility that the Taj Mahal will be expanded. And I have to hope that the city-that-elected-John-Street-mayor-twice will get its act together to do what? Throw together some slot machines?

Too many maybes for me. What excites me, moreso than pocket aces, is the revitalization of Caesars and Showboat, the revenue generation of the centrally-located Bally's, and the much-needed expansion of the Borgata. This is the future of Atlantic City. And which companies are behind these moves? HET, BYD, and MGM.

Before I move onto the numbers that justify my beliefs, let's take a quick look at a fool named Jeff Hwang, from Motley Fool who somehow attempts to justify considering WPTE:

Does WPT have a business or doesn't it? If so, is parent Lakes Entertainment (OTC BB: LACO.PK) the better value? And if so, should you be willing to touch Lakes with a 10-foot pole? I gotta confess: As soon as I wrote that, I lost all interest in both stocks.

I mean, why even bother looking at a company where I have to ask those kinds of questions? After all, I've been buying three other high-quality companies for my own portfolio lately: Barry Diller's InterActiveCorp(NYSE: IACI), IAC's recently spun-off online travel leader Expedia(Nasdaq: EXPE), and slot machine giant International Game Technology(NYSE: IGT). All of them have legitimate businesses, generate bucketloads of cash, and look very much like values at current prices.

Last time, I concluded that if WPT's currently deserted online gaming business ends up being worth anything at all, the stock has legitimate upside, but that the rest of the business was worth only about half the stock's market price.

As it turns out, the stock closed yesterday at $8.84 per share, a mere 10.5% premium to WPT's $8-per-share IPO price in August 2004. A big reason for the decline was online gaming leader Party Gaming's (LSE: PRTY)prediction earlier this month that growth rates would slow. If the online gaming market isn't going to be as big as everybody thought, then obviously WPT's potential in that area is slimmer, particularly if it can't shake its current status as a fringe player.
On the other hand, despite the questions surrounding the potential of its online gaming business, WPT is starting to look interesting. The company's media and product licensing business is legitimately profitable. (That said, I also think that Harrah's Entertainment(NYSE: HET) -- another stock that is starting to look attractive after its recent pullback -- represents a much tougher competitor than I previously believed, especially since its acquisition of Caesars extends the reach of its World Series tournament circuit.) In addition, I believe that WPT's brand value is increasing as the company continues to further penetrate international markets, which should support the online business, at worst, as a means of cheap and effective marketing.

Should the stock fall much further, I think that investors may be able to purchase WPT's media and product-licensing businesses -- plus the brand -- at fair value and get the online business for free. To me, that looks a lot like a value opportunity.

I'm having a bit of trouble taking this writer's views seriously. The World Poker Tour is an entertaining bit of television, but is it a brand worth hundreds of millions of dollars? Even more than the Trump brand, there's a whole lotta nothing backing the WPT.

The World Series of Poker brand is just as marketable and valuable, and has a fundamentally strong company backing it up, Harrah's.

Side note: I reluctantly find myself in agreement with Jeff Hwang about IGT.

I'm letting it ride over on the WershovenistPig Stock Watch List, not making any changes in the casinos. So let's quickly get the numbers out of the way:

Ticker/Share Price(as of whenever I checked during the afternoon of 10/4/05)/PEG/ROIC/Enterprise Value/CNBC Stock Scouter Score
(Data is from smartmoney.com, unless it's from CNBC)

TRMP - $17.85 - na - na - na - na
HET - $66.26 - 1.27 - 3.71% - $172.32 - 6/10
BYD - $42.85 - 0.99 - 5.79% - $65.73 - 4/10
MGM - $44.33 - 1.53 - 4.01% - na - 7/10
AZR - $31.43 - 1.86 - 3.17% - $47.03 - 5/10
PENN - $31.48 - 1.16 - 6.27% - $35.38 - 3/10
IGT - $27.92 - 1.44 - 15.15% - $24.95 - 10/10

HET has a decent PEG, and a surprisingly high enterprise value. Might have to check smartmoney.com's numbers on that. BYD has a PEG just below 1, a high ROIC compared to its peers, and a share price below its enterprise value. And IGT has an even higher ROIC and some significant recent insider buying.

Now I got to get some studying done and get this whole patent attorney thing squared. And then I can go satisfy my poker jones.

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