Trump -- A Trick*
By Paul "Pallbearer" Larson (TMF Parlay)
725 Fifth Avenue
New York, NY 10022
Halloween has been a good holiday for me in years past. In fact, the last two casino stocks given as tricks, Stratosphere (OTC: TOVWQ) in 1996 and Great Bay (OTC: GEAAQ) last year, both declared bankrutptcy within a few months after Halloween. As of this writing (10/26), the stocks are down 96% and 83% respectively since they were featured here. Let me tell you, Fools, those are tough acts to follow.
This year I've been scanning the gaming landscape for yet another basket case and, quite frankly, there isn't any one stock out there that looks like it is going to imminently give up the ghost like in years past. That does not mean, however, that there is not one rather scary stock out there that should be avoided like a dentist come November 1st.
Trump (NYSE: DJT) is the name, and casinos are the game. Unlike the terrifying picks of years past, interest expenses have not spiraled out of control. Yet. Bankruptcy looks rather unlikely over the next several quarters for the company, but it is certainly within the realm of possibility in the longer term.
There are essentially two types of risk that financiers define -- business risk and financial risk. The risk of Trump's core business getting hurt in the future is only moderate, but there are still some concerns. First is the expected competition on Trump's home turf of New Jersey over the next few years. Not only are some of the existing and better-funded competitors such as Hilton (NYSE: HLT) and Harrah's (NYSE: HET) busy upgrading and expanding their resorts next to Trump, but the big names of MGM Grand (NYSE: MGG) and Mirage (NYSE: MIR) own large chunks of land in Atlantic City planned to be developed in the near future.
Even with the expected competition, there is really not too much wrong with Trump's business model, since the casinos throw off impressive amounts of cash flow that are relatively stable at the moment. However, the real problem comes in when you look at how the company is financed. While in the past 12 months Trump had operating cash flow (EBITDA) of $219 million, interest expenses to fund the $2 billion worth of debt ate up 96% of this money that was generated. It wouldn't take much to push the company over the brink towards bankruptcy, where interest expenses chew up more than can possibly be generated from the business. Be forewarned -- the holders of the company's bonds really own the company, not holders of common stock.
With the company's delicate financial position, there is a severe lack of cash for capital improvements needed to meet the competition. Gamblers tend to like the newest resorts with the nicest amenities. Trump's casinos, to be sure, aren't getting any younger. Meanwhile, the ribbon cutting for Mirage's billion-dollar behemoth is not getting any further away. Remember, in Trump we are dealing with a company that has no dollars saved for a rainy day.
The real danger to those shorting the stock, such as the Fool Portfolio, is either a buyout or a refinancing of the debt. Nevertheless, one of the company's refinancing efforts failed earlier this year, and it looks like any further attempts are going to meet resistance, too. Bondholders will want to be compensated for the financial risk they have taken. This means Trump's rather high financing rates are likely to continue.
The company's balance sheet is screaming "Help Me!" But potential saviors are, unfortunately, few and far between. To be sure, the merger and acquisition scene in the gaming industry is not what it was a year ago.
With the two main leaders of consolidation in the industry, Hilton and Harrah's, already owning several Atlantic City casinos, it is doubtful they are interested in any of Trump's properties there. On the other hand, a lot of the high profile and relatively expensive mergers in the industry, such as the one between Station Casinos (NYSE: STN) and Crescent Realty (NYSE: CEI), have blown up.
Simply said, the multiple of cash flow potential acquirers are willing to pay has dropped like a guillotine. Furthermore, many of the tax-advantaged paired-share REITs that were interested in the industry, like Starwood Lodging (NYSE: HOT), are finding that slot machines, tax breaks, and politicians simply don't mix. With no buyers in sight and industry multiples what they are, a buyout anywhere close to a price that would raise the stock just does not look like it is in the cards.
Of course, here in the Fool reams have been written about Trump and this situation, and this idea may be rather old to some regular Fools. Sometimes, however, the most obvious picks are the best.
-- Trump Message Board
-- Check the Most Recent Price
-- Trump Dueling Fools - 4/22/98
-- Fool Portfolio Short DJT Report - 4/23/97
-- Fool Portfolio - 8/18/98
-- Fool Portfolio - 9/16/98
-- Fool Portfolio - 9/18/98
* A Ghoul's Opinion represents the opinion of one Ghoul and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Ghoul's thoughts.