Lil' Penny reviewed on a rare day
by Jeff Fischer
ALEXANDRIA, VA (Aug. 18, 1998) -- Every Fool stock rose today. Except, that is, for Trump. Our sole short declined. This is memorable. This is beautiful. This is unusual. This is Michelangelo on his most brilliant day. This is Picasso founding Cubism. This is Einstein formulating his theory of general relativity.
So, let's hope that tomorrow we're not Pompeii being buried by ash.
On a day more rare than the Narwhal Beanie Baby (e-mail TMFKnave if you have questions about that), the Fool Port gained nearly 5% on strength across the board, but especially in Internet stocks. There was little news to report, which is good, because today we have an interesting...
In our methodical review of each Fool Port stock, it's time for us to cover our one and only short. (Please don't read anything into that sentence or the bold font. And if you didn't get the lame pun, you should probably read the Fool's 13 Steps to Investing Foolishly, where step 11 explains the art of shorting stocks.)
Here she is, our one short, in all her glory...
Trump Hotels (NYSE: DJT) Stock Price: $4 15/16 Market Cap: $109 million Trailing Sales: $1.3 billion Price/Sales: 0.08 Last Qtr Sales: $344 million Reported book value: $13.92 per share Price/book value: 0.3 Recent return on equity: -16% Recent Operating Margin: N/A 5-year est. growth rate: 10% Earnings Est: -$1.53 in FY98 Earnings Est: -$1.57 in FY99 P/E on far earnings estimate: N/AWhat caused the Fool to short it? This is easy.
The Fool's short sell report from April of 1997 explained with great detail why we were shorting the company. At the time, Trump Hotels had crushing debt and growing interest payments, and there was nothing but increased losses and growing competition on the horizon. This remains true. On top of this, Trump's business is fairly capital intensive due to the need to keep casinos "fresh" and cutting-edge (if either of those qualities is actually possible in this business) in order to continually attract customers. Add it all up, and Trump appeared to be in a losing proposition, one that, as we said in our sell report, might come up "snake eyes."
What has happened since the short sale? Again, easy.
So far, many of the arguments behind our short are now playing out. The company is seeing declining revenue due to competition, larger losses and no debt relief, and has aging property that it can't readily afford to upgrade. In the past year, more casino boat competition has floated onto Lake Michigan and Indian casinos are biting into Atlantic City's business. Also, three new state-of-the-art casinos are planned for Atlantic City, including possible offerings from Mirage (NYSE: MIR) and MGM Grand (MGG), for the years 2000, 2001 or so.
(Uh oh for Trump!)
Still, this short has far from always been a winner for Le Fool Port. (Please remember to always raise both arms and shout that: Le Fool Port!) We were down over 30% last year after the stock rose above $11 on word that Trump was trying to sell property, and on other promises to improve the business that were so forgettable that I've forgotten them. They were nothing if not realistic, and they weren't realistic.
As a result, this year the stock has steadily wilted, and recently, after reporting arguably its worst quarter in a long while last week, Trump is now seeing a new all-time low of below $5. The company traded $750,000 worth of shares today. That's all. It is perhaps indeed becoming "Lil' Penny" -- a penny stock. Or "Tiny" -- as David calls Trump.
For the most recent analysis of Trump, we asked Paul Larson (TMF Parlay), our Fool who focuses on the gaming industry, for his take on the situation. Here's what Paul had to share:
"Though disguising his intentions, Jeff essentially asked if I would take a little bit off his workload (the lazy bum) by writing about Trump, and I happily told him I would be obliged. He essentially wanted me to quickly scribe some thoughts on earnings that were released last Thursday.
"I think that Jeff hit most of the salient points I wanted to make in Thursday's recap. The company looks like a slowly sinking ship at this point, with lower operating cash flow coming perilously close to not covering its higher net interest expenses. The company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization -- otherwise known as "blah, blah, blah") was down 12% in the most recent quarter while net interest expenses were up over 4% versus the same period last year.
"EBITDA can be thought of as something analogous to gross profit. Meaning, it's the amount of cash generated by the core business before paying non-cash expenses (depreciation, amortization), Uncle Sam (something the company doesn't need to worry about!), and interest expenses. With the mountain of debt that Trump carries, the interest line on the income statement is obviously the biggest hole from which cash leaks out of the company.
"With a company as leveraged (read: in debt) as much as Trump is, having EBITDA and interest expenses trend as they have over the most recent quarters cannot make "Lil' Penny" feel very good. Let's take the focus out a bit wider and see how this liquidity issue looks for the first half of the past two years:
Trump Hotels and Casino Resorts
6 Month Results
(millions) EBITDA Interest Expense Coverage Ratio 1997 $128.2 $102.1 1.25 1998 $108.6 $106.2 1.02"Anyone else notice a trend here? Look at it this way, almost 98% of the company's cash generated from operations so far this year has been marked towards nothing more than paying for interest expenses. No, not principal, just interest.
"And as interest expenses suck more life from the company, there is less cash with which to possibly improve results by maybe, say, remodeling a casino or adding a hotel wing. The worse the financing picture looks, the worse the operating picture looks, which in turn makes the financing even more scary, which then causes the company to cut even more corners operationally, and so on and so forth. It truly is a nasty loop that Trump, it appears, has taken the initial spins around.
"Things are far from critical, however, because the company does have some small pieces of good news with which to exploit. The first is the fact that the company has found a banker crazy enough to refinance some of its debt at lower rates. This will certainly help the interest expenses be reduced somewhat (though only by about $9 million per year so far), but I've got to wonder how much financiers out there can lower rates to what seems to be such a high-risk client.
"Furthermore, the company did report some dramatically better numbers for the month of July in Atlantic City. You can see how well the company did in July by reading this story from the Las Vegas Sun.
"So, maybe the company can get itself out of the nasty loop that ultimately ends in bankruptcy, but I believe the thinking of those in the Fool Port ranks is that the results, while bad, can stand to get even worse.
"Of course, if any Fools out there wish to discuss Trump further with either myself, or Jeff, or David, make sure to swing by the Trump message board over on the Fool's website. We regularly read and often post to that particular board and enjoy the interaction with Fools from around the globe."
Thanks, Paul! Great insight. Plus, you just wrote half the column for me.
What lessons have been learned? Invest your hard earned cash in strong, sustainable, dynamic businesses and industries that are profitable or have the promise to be so in the near future. Don't invest in debt heavy laggards that lack a propensity to earn money or ever really grow. Why would you want to invest in gambling anyway? Isn't that an oxymoron? "Invest in gambling."
We've also learned to be patient. Like a giant in the Land of the Lilliputins, Donald Trump has gone on CNBC and boasted about the future plans of his company, often sending the stock higher that very day. We held through the winds of gossip, though, focusing instead on the business's fundamentals, which were ever smaller and weaker. This company makes hardly a whisper as its motor runs. It is slowly fading into darkness, it seems.
What could cause the Fool to cover? We held a "Cover the Donald?" contest two weeks ago and nearly 200 Fools shared thoughts on what we should do with Trump. Most said to cover, meaning close the position (this was at a price 14% higher). About 35% said to keep the short and let it wither. We're now in the process of... thinking about it. It's hard to foresee any fundamental business changes that might cause us to cover. There don't appear to be any looming on the horizon.
But, we have doubled our 20% goal on this short and we have also beat the market with it as of today (earning 41% on the short while the S&P 500 has gained 37% since April 31, 1997, and the Dow only 24%). So, we might take the money soon and move on. Hard to say right now. The market soared the past two days and Trump hit new lows. That's lovely. Plus, remember that we borrowed $9,900 when we shorted somebody's shares of Trump, and we have now earned $4,130 on their shares. We're beating the S&P basically with "air" -- having never put our own money into Trump whatsoever. A situation like this is difficult to kiss good-bye. So, maybe we're instead rooting for $4 now. The business is weak enough to hope for it.
This short has been Foolish for many reasons, no matter how it turns out. However, shorting is not for everyone. (Necessary disclaimer: Please read all about this method of investment in the 13 Steps linked above, and also visit our shorting stocks message board before you consider shorting.)
For more reading tonight, Cash-King covers Intel (why is it sizzling?), and Drip Port reviews Fifth/Third Bancorp. How did this leading bank, founded in 1863, get its tricky name? And which stock do we prefer for purchase right now: Mellon Bank or Fifth/Third Bancorp? -- in today's Drip.
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Day Month Year History Annualized FOOL +4.94% 2.85% 51.26% 407.62% 49.56% S&P: +1.62% -1.74% 13.48% 140.23% 24.26% NASDAQ: +2.04% -0.92% 18.13% 157.59% 26.42% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 110.25 2931.81% 9/9/97 580 Amazon.com 19.11 128.69 573.38% 5/17/95 1960 Iomega Cor 1.28 5.00 290.50% 10/1/96 84 LucentTech 23.81 89.88 277.50% 8/12/96 130 AT&T 39.58 56.69 43.23% 4/30/97 -1170*Trump* 8.47 4.94 41.70% 2/20/98 200 Exxon 64.09 70.19 9.51% 2/20/98 215 DuPont 59.83 56.19 -6.09% 2/20/98 270 Int'l Pape 47.69 42.81 -10.23% 7/2/98 235 Starbucks 55.91 42.44 -24.10% 8/24/95 130 KLA-Tencor 44.71 31.56 -29.41% 8/13/96 250 3Com Corp. 46.86 29.88 -36.25% 1/8/98 425 3Dfx 25.67 14.06 -45.21% 6/26/97 325 Innovex 27.71 15.00 -45.87% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 78277.50 $75695.63 9/9/97 580 Amazon.com 11084.24 74638.75 $63554.51 5/17/95 1960 Iomega Cor 2509.60 9800.00 $7290.40 10/1/96 84 LucentTech 1999.88 7549.50 $5549.62 4/30/97 -1170*Trump* -9908.50 -5776.88 $4131.63 8/12/96 130 AT&T 5145.11 7369.38 $2224.27 2/20/98 200 Exxon 12818.00 14037.50 $1219.50 2/20/98 215 DuPont 12864.25 12080.31 -$783.94 2/20/98 270 Int'l Pape 12876.75 11559.38 -$1317.38 8/24/95 130 KLA-Tencor 5812.49 4103.13 -$1709.37 7/2/98 235 Starbucks 13138.63 9972.81 -$3165.81 6/26/97 325 Innovex 9005.62 4875.00 -$4130.62 8/13/96 250 3Com Corp. 11715.99 7468.75 -$4247.24 1/8/98 425 3Dfx 10908.63 5976.56 -$4932.06 CASH $11876.47 TOTAL $253808.15