Rule Breaker Portfolio
By
With Foolish verve, David narrated our visit to the top of Trump Tower in Wednesday's column. It is true that the visit played a pivotal role in our decision to cover the stock. It is also true that we liked Mr. Trump and Mr. Ribis, Trump's CEO. But that isn't why we covered the stock. We covered because we believe what the men said, and what they said regarded the business of Trump Hotels & Casino Resorts.
The company is buying back debt when it can ("I love to buy back debt," Trump said repeatedly, and he has bought back debt with skill in the past). The company is also planning to refinance a chunk of debt this fall or winter, and I believe another substantial chunk should be refinanced in 2000 (the dates are blurry because I was reading the magazine covers hanging on the walls). Mr. Trump and Mr. Ribis gave their word. Refinancing will happen. The debt is "good" debt, they reassured us. Everybody knows that Trump will not default, they said. Refinancing the company's debt will not be a problem.
If you have read the Fool's short report on Trump, you know that one foundation beneath our short position was the potential for Trump to default on its debt. In contrast, one possibility that would make us reconsider our short position was a refinancing of the debt. A refinancing of Trump Hotel's $1.8 billion long-term IOU could firebomb the main motive behind our short.
The main factor stomping Trump Hotels into the ground like bad grapes is the massive $54 million interest payment that it makes every quarter. The interest payment is giant because Trump Hotels pays 11.5% and approximately 15.5% interest on its two main chunks of debt. Nicholas Ribis threw around numbers that suggested an 8% to 9% interest rate on the debt in the future. If Trump can knock its interest rates down to these levels, interest payments will substantially decrease and the flood of quarterly net losses could finally subside.
The refinancing won't be immediate (again, this winter may bring the first move in this direction), but beginning this month, Trump and Ribis are hitting the road to discuss the company with Wall Street analysts and investors. They have never done anything like this before. In fact, the 66 minutes that they gave us were the first minutes they have ever taken, they said, to simply talk about the company with investors. The presentation was convincing.
Trump has an air of confidence that is unmistakable, if not larger than life. However, more important than the "show" that the two of them put on were the words of promise that floated in the confident air, from both Donald Trump and from Mr. Ribis's likable, if not caricature-like, personality. The following paragraph is a combination of the two of them, paraphrased as "one," for the first time in history. Read this quickly and alternate your voice between deep and certain (Donald), to high, crisp and tart (Nicholas):
"We can buy back our debt. And we're going to refinance our other debt. That's right. We've already bought back debt and nobody pays any attention to that or even understands it. That's right. What you see on our books isn't all real debt. No, it isn't and nobody seems to know that. There's debt on there that we owe to ourselves because we've bought it back. That's right. And we'll refinance the rest of the debt. Yes. Plus we have all the best property in Atlantic City. Las Vegas is EXPLETIVE DELETED, and it's choking on its own expansion. Atlantic City does better business than Las Vegas. And I own the water in Atlantic City. That's right, we own the water. Mirage Resorts (NYSE: MIR) can't build in Atlantic City without paying billions. And we have five-star properties. We're the only casino company to get five-star awards. That's right. We're worth more than what the market is giving us [which is $108 million in market cap, but the enterprise value of the company is about $1.7 billion]. We are worth more. We're undervalued. That's right. Mirage is valued at $2.5 billion and they'll probably have more debt than us after they build in Atlantic City. That's right. But we'll have a better business anyway."
"So," we said, following the swirl of talk, "we should cover you and short Mirage?" [Laughter.]
"Yes, we'd like that."
And on and on.
The main goal at Trump Hotels now is to address the long-term debt. That was the answer provided when David G. looked up from his PalmPilot (which he used for a few Foolish reasons) and asked how the company was going to create value. When Trump answered, "Debt is our first focus," I said, "We read that Trump Hotels is investing in South American hotels, though. Why is that?" Trump searched his memory for a second and then said, "You know, I remember that. One day I began to get phone calls from people saying, 'Donald, what're ya doing in South America?' And I said, 'I don't know, what am I doing there? I have no idea.'" (Nicholas smiled and shook his head.)
It turns out that the press release claiming Trump Hotels invested in South America was a sham. Another company issued it, apparently, for its own benefit. Trump is not doing anything there, nor anywhere else. Trump Hotels isn't spending money or taking on more debt. "That's too bad," we said, "because we were hoping you would." They laughed, then said, "We know what you were hoping."
To close, we covered the stock because we believe Mr. Trump and Mr. Ribis when they say they are addressing the debt. Our hope for a lower share price largely goes out the door if debt is addressed, and at the same time -- as Paul wrote on Thursday -- the potential for a rising stock walks into the room. So, as David said, "Fare thee well, Donald." It was a pleasure. The Fool earned 42% on the 30-month short, and we met two interesting people at the end of the adventure.
So, who might we want to meet next!?
Other Bits O' Gossip
In one sense, America Online (NYSE: AOL) said "fare thee well" to new employee and Netscape co-founder Marc Andreessen. I was surprised that Andreessen went to AOL in the first place, although he had an incentive or two. Or millions. Andreessen will remain with AOL as a part-time strategic advisor focused on investments, which he enjoys.
eBay (Nasdaq: EBAY) gained $25 this week, or 18.7%, largely because a few analysts patted the stock on the back and one analyst offered a $208 price target while citing the eventual size of the online auction market. Amazon (Nasdaq: AMZN) gained on positive analyst comments regarding the holiday season. So, no real news, simply things that most investors already realize! It is amusing that when common sense is presented in an official press release the information can somehow have more value.
For other Foolish reading, we are taking a close look at Wrigley (NYSE: WWY) in Drip Port. Wrigley is a business that Brian Graney (TMF Panic) and I might find to be as respectable as Coca-Cola (NYSE: KO). We shall see. For the entire week of Foolishness, see FoolWatch.
For now, fare thee well. Have a Foolish weekend!
--Jeff Fischer
RSS Headlines
Fool UK
