Harrah's On a Hot Streak [News] February 9, 2000

Harrah's On a Hot Streak

By Richard McCaffery (TMF Gibson)
February 9, 2000

Casino and gaming industry company Harrah's Entertainment (NYSE: HET) capped off a strong year this morning, reporting that fourth quarter revenues jumped 42%, and EBITDA (earnings before interest, taxes, depreciation, and amortization) before unusual items increased 38% to $152.7 million.

Gaming investors generally focus on EBITDA, or cash flow, since it gives them a clear view of the company's earnings power before adding depreciation, amortization, and other nonoperating figures that obscure the picture. Capital expenditures run high in the industry because it takes sparkling hotels and new gaming equipment to lure gamblers.

As a result, EBITDA is a better approximation of earnings strength than net income and Harrah's generates high cash flow relative to its peers. Its 1999 EBITDA (minus one-time charges) came in at $718.3 million, up 54% for the year. Rival Park Place Entertainment (NYSE: PPE) reported solid 1999 EBITDA of $778 million, but levels grew just 14%.

Many trends pushed casino stocks higher this year, including new facility openings, high tourist counts in Las Vegas, and a booming economy that provides consumers with lots of disposable income. These trends, with the exception of multiple new openings, are expected to continue in 2000.

Harrah's same-store gaming revenues increased 14% for the year, which helped drive EBITDA higher, and obviously point to the attractiveness of Harrah's casinos. These figures were driven in part by the company's Total Gold program, which basically provides gamers with incentives to use Harrah's casinos. The company now has 18 million Total Gold customer accounts, which makes it the industry leader. In an industry where it can be difficult to find a competitive advantage, the program has given Harrah's a nice lift.

Currently the company trades at about 6.97 times trailing EBITDA for the year, helped in part because the shares have slipped about 30% since November. All I did to find this number was determine Harrah's enterprise value per share (market value plus debt minus cash) relative to its trailing EBITDA per share.

Using this measure, you can see Harrah's compares favorably to quality rivals like Station Casinos (NYSE: STN), which trades at a slightly higher rate of 7.07. These numbers don't tell you how much the company is intrinsically worth, but they give you a quick feel for how companies are priced relative to peers. It's also more instructive than using P/E ratios since it includes cash and debt and focuses on EBITDA.

Though the company's new casino in New Orleans turned in disappointing numbers for November and December, Harrah's is optimistic it can turn things around. It's moving to align operating costs with volumes, bringing in slot machines its customers have asked for, and, so far, generating heavy traffic from locals.

New initiatives in 2000 include measures to drive margins higher. The company is installing yield management systems in its hotels to better evaluate demand, and implementing better labor management tools.

If the gaming industry interests you, Harrah's is one of the industry's strongest competitors and is worth a closer look.

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