Station Casinos Rolling Lucky Sevens (News) December 17, 1999

Station Casinos Rolling Lucky Sevens

By Richard McCaffery (TMF Gibson)
December 17, 1999

Gaming industry company Station Casinos (NYSE: STN) announced last night it expects even a better fourth quarter than investors hoped for as revenues at its Las Vegas and Missouri Casinos drive profits.

Station expects earnings (excluding one-time charges) in the $0.32 to $0.34 per share range, ahead of estimates by at least $0.02. It also expects earnings before interest, taxes, depreciation, and amortization (EBITDA) to increase 30% over last year's mark.

After falling almost 30% this month, the stock climbed about 3% in trading on the news. Apparently, the stock moved down on scares related to a Missouri Gaming Commission investigation into actions by the company's outside attorney in Missouri. Station officials said it's not aware of any improper actions.

Despite the recent softness, Station has been a world beater this year. Even with the recent selloff, the stock is up almost double, from $9 to $17 in the last year. Other strong performers in the industry are Harrah's Entertainment (NYSE: HET), up about 65% this year, and MGM Grand (NYSE: MGG), up 116%. The gaming industry has thrived as new casino openings in cities like Detroit create a gambling buzz.

Station owns and operates five casinos in Las Vegas and two entertainment facilities in Missouri. It has a niche model in the gaming industry, catering to local gamblers rather than tourists.

Gaming company executives and analysts like to talk about Station's cash flow (EBITDA) situation, which has been steadily increasing for nine quarters. It's common for companies with heavy upfront costs to focus on EBITDA as a way of demonstrating earnings power. In October, the company reported EBITDA of $61.7 million, up 20% from $51.5 million a year ago.

While it makes some sense for companies to use this as a measure, it's important that investors don't confuse cash flow with, well, cash. In the strange world of accounting, it's not the same thing.

See, most of the time when we talk about cash at The Motley Fool, we're not pulling punches -- we mean actual dollars. The kind of cash flow Station is talking about is based on earnings, and earnings (here's where it gets really confusing) are based on the accrual method of accounting. What that means is that revenue is recognized when sales are made and expenses are recorded, not when the actual cash comes in.

If you look at Station, however, it's doing a nice job generating cash from operations, too. For the nine months ended September 30, it pulled in $132.4 million in cash from operations, up from $78.8 million a year ago.

Still, an analysis of the company's debt shows some chinks in the armor for the picky investor. Debt generally runs high in the gaming industry because it costs so much to open and operate hotels. Although Station has paid down over $200 million in long-term debt since December, cutting its long-term debt/equity ratio to 2.89 from 3.51, it still has a much higher ratio (more debt) than competitors Harrah's and MGM Grand.

A closer look at the company's debt load is needed before moving forward.

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