By
The company reported earnings of $22.3 million, or $0.53 per share, up from $6.3 million, or $0.18 per share, a year ago. Analysts expected the Las Vegas, Nevada company to earn $0.44 per share.
Station has picked up speed as it's contained capital spending costs and cranked up the cash flow from its eight casino properties. Lower operating costs also boosted quarterly profits. Station's sales, general, and administrative costs as a percentage of revenues dropped to 18% in Q1 from 21% a year ago.
Shares of Station jumped 13% to $28 5/16 -- a new 52-week high -- in trading this morning. The shares have more than doubled over the last year as the company started paying down debt, and its focus on the locals market has generated strong cash flow.
It's worth taking a look at the company's niche focus since it provides a good example of how a company can break into a super-competitive market. Frank Fertitta, the company's founder, started Station in 1976 by setting up a 5,000-square-foot bingo parlor on the west side of town -- which at the time was far removed from the busy Las Vegas strip. Fertitta's son, Frank Fertitta III, is the company's current chairman, president, and chief executive.
He wanted to attract local gamblers by building casinos closer to their homes, near major highways and with lots of parking. Now the company is the only operator that owns a casino in all four quadrants of Las Vegas, and it has expanded its locals strategy to Missouri. Gamblers can get to a Station property in about 15 minutes from anywhere in Las Vegas.
There are a couple of advantages to targeting local gamblers rather than tourists. First, since Station isn't a destination site it doesn't have to worry about filling hotel rooms and convention centers, or selling out concerts to make a profit. Actually, it now owns about 2,300 hotel rooms in Vegas, so that is an issue for the company, but much less than it is for some of the major destination resorts like MGM Grand (NYSE: MGG) and Mirage (NYSE: MIR).
Second, Station sees it customers from two to four times per week, compared to one to three times per year for many of its competitors. This gives Station a chance to build loyalties through programs like its Boarding Pass initiative, which allows guests to earn points based on their level of gaming activity. Station also has higher customer payouts than its competitors (meaning its customers take home more money on average), which also helps build loyalty.
Finally, Station capitalizes on the fact that Las Vegas is one of the fastest-growing cities in the U.S. The locals gaming market is expected to grow 5% to 7% annually, and Station is expected to grow profits 17% annually over the next five years.
Investors interested in Station should focus on two issues -- debt and free cash flow. Long-term debt increased a bit this quarter to $951.8 million as the company purchased two new gaming sites in Las Vegas, bought $25.9 million in stock, and spent $2.7 million on upgrades. Long-term debt stands at $948 million, giving the company a horrible debt-to-equity ratio of 4.9.
Still, the company generates amazing cash flow. Great cash flow is like great shooting in basketball -- it makes up for a lot of sins. For one thing, 85% of Station's revenues come from slot machines and most of that revenue flows right to the bottom line.
Looking at the company's cash flow statement from 1999, Station earned $97 million in free cash flow (which measures cash from operations minus capital expenditures). That's rare for a casino company since capital expenditures are such a big part of the mix. Subtract 1999 interest payments and the company still generated more than $10 million in free cash flow. Few other casino operators managed such a feat, including high-quality companies MGM Grand, Park Place Entertainment (NYSE: PPE), and Harrah's Entertainment (NYSE: HET).
Station earned $2.30 in free cash per diluted share last year and is trading at a multiple around 13x free cash flow. This is a rich valuation compared to where the company stood a year ago. Investors interested in casino companies should pay close attention to Station, but understand that there isn't a margin of safety built into the shares at the current price.
Related Links:
RSS Headlines
Fool UK
