<THE RULE BREAKER PORTFOLIO>

Great Trump News

By Paul Larson (TMF Parlay)

CHICAGO, IL (July 9, 1999) --Casino company Trump (NYSE: DJT) was the top-performing stock on the NYSE yesterday when the company jumped 33% on rumors of improving fundamentals in Atlantic City. However, this morning we found out what the real scoop was behind the rise. The Wall Street Journal reported today that Trump was planning on razing the company's World's Fair casino on the Atlantic City Boardwalk to make room for a new $750 million casino complex. Needless to say, we read the news with great interest since Trump is the Rule Breaker's lone short position.

I think that from a short seller's perspective this is truly great news. Not only does this mean the company will be taking on more debt and/or diluting the company's common stock, but this also means that a significant chunk of the Trump empire will go offline later this year. For a company that is in such a frail financial state to begin with, this just may be the proverbial straw to break the company's back.

First, let's consider Trump's financial position. The report cited that Trump was interested in "partnering" with a Las Vegas operator to build the new casino. This is because the company really has no funds with which to build the casino on its own. Need proof? Let's peek at the company's balance sheet to see how it has changed over time:

(millions)          3/31/99      3/31/98    3/31/97
Cash                  $152.2     $192.0     $187.8 
Total Liabilities    $2064.8    $2052.9    $1953.1
Shareholder Equity    $261.6     $309.0     $361.4

Notice that the company's cash and equity have been generally decreasing over time while Trump's debt continues to mount. Assuming the company needs about $100 million in cash for general operating purposes, that means that the company only has available about $50 million of the $750 million price tag of the new resort. Where's the balance going to come from? It's either going to come from another round of debt financing (even higher interest payments), selling more stock (massively diluting shareholders), or from partnering with another company (sharing the profits, if they come).

I would be absolutely shocked if Trump could find bankers crazy enough to lend the company money at anything less than credit card-like interest rates. Here's a company that already has several junk bond issues trading below par that have coupon rates in the low and mid-teens. The more the company borrows, the higher the credit risk it becomes, which means higher and higher rates. With this new plan and overall rates on the rise, it will become increasingly difficult for Trump to refinance the current debt at lower rates (let alone raise cash), which is something the company desperately needs to do.

Let's assume Trump is able to sell some junk bonds with a 17% coupon rate. Note that the company already has debt with a coupon rate of 15 1/2% and yielding even higher in the bond market since it is trading below face value. Either way, a 17% cost of capital hurdle is no easy burden to overcome even for the best of companies, let alone one with such a spotty history as Trump.

The equity markets are also essentially closed to the company at this time. Even if the company's investment bankers could help pump the stock to $7 per share, to fund only half the new project ($325 million) with stock would mean over 46 million new shares outstanding, more than doubling the company's outstanding shares. Can you spell D-I-L-U-T-I-O-N?

Then there's the issue of having to take offline one of the company's main sources of revenue in order to build the new resort. Trump's World's Fair is part of the larger Trump Plaza complex. According to the company's annual report, World's Fair has roughly 35% of both the hotel rooms and casino floor space of the total Plaza property.

For reporting purposes, World's Fair is combined with the results of Trump Plaza, so we have to crunch some numbers to get the estimated effect of razing the unit. Let's give Da Donald the benefit of the doubt that World's Fair really is a "loser" and allocate 30% of Trump Plaza's revenue and only 20% of earnings before interest, taxes, depreciation, and amortization (EBITDA) to World's Fair. Using these back of the envelope estimates, this would mean that the demolition would cause about $120 million in lost annual revenue and $15 million in lost operating cash flow.

$15 million may not seem like much to a company that had sales of $1.4 billion last year, but it's a different story when considered in the context of the extended debt position. Last year the company produced roughly $240 million in EBITDA (otherwise known as operating cash flow) while it had interest expenses of $213.5 million. Lose $15 million in operating cash flow from World's Fair, harm the rest of Trump Plaza's results from construction-induced impairments, increase the interest expense to actually build the new complex, and it looks like this new plan is just the ticket to get Trump's interest expenses to eat up every single dime it produces. Great news for the shorts!

Did I forget to mention that Trump did a fairly major renovation of World's Fair a mere three years ago? That means a large write-off is coming down the pike if the unit is scrapped. While a non-cash expense, this fact shouldn't exactly instill investor confidence in the company's spending habits.

To make a long story short (no pun intended), this new plan of Trump's highlights the exact reasons why the Rule Breaker maintains its short position in Trump. The debt is already sky-high and rising while management has proven very adept at losing shareholder value. It's not that Trump's actual business is bad ($240 million in operating cash flow is a fairly impressive number), it's just that the financing of the company stinks and looks to get even smellier. Financial Armageddon at Trump may come sooner rather than later if this plan goes forward.

Before ending this recap, let's see where the Rule Breaker portfolio ended the day and the week:

               Day       Week
Rule Breaker  +0.68%    +4.45%
S&P           +0.54%    +0.87%
Nasdaq        +0.77%    +1.90%

Finally, if you find yourself near a radio this weekend in one of the markets that receives the Motley Fool Radio Show, make sure to tune in. Or listen online. This week Dave and Tom will have Weird Al on the show. And for all you would-be song writers out there, we also have a contest running to see who can write the best financial parody to a song. Want to know more about this? Click here and get on the boards!

Have a weird weekend, Fool.

07/09/99 Close

Stock  Change    Bid 
------------------ 
AMGN  +3 11/16   69.31
AMZN  +  1/8    125.50
AOL   +  7/16   128.13
ATHM  -1         53.81
CAT     ---      61.19
CHV   -  7/8     97.25
DD    +3 3/16    71.69
DJT   -  9/16     6.06
EBAY  +1 9/16   135.75
GT    -  1/2     57.44
IOM   +  1/4      4.69
SBUX  +  7/16    25.06
TDFX  -  5/16    14.56

                  Day     Month  Year   History   Annualized 
      R-BREAKER  +0.68%   5.02%  35.11% 1256.07%   69.78%
        S&P:     +0.64%   2.22%  14.74%  220.38%   26.67%
        NASDAQ:  +0.77%   3.98%  27.38%  287.83%   31.68%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    128.13   13997.49%
   9/9/97  1320 Amazon.com     6.58    125.50    1807.51%
  5/17/95  1960 Iomega Cor     1.28      4.69     266.09%
  12/4/98   900 Excite@Hom    28.04     53.81      91.91%
 12/16/98   580 Amgen         42.88     69.31      61.66%
  2/26/99   300 eBay         100.53    135.75      35.04%
  2/23/99   300 Caterpilla    46.96     61.19      30.29%
  4/30/97 -1170*Trump*         8.47      6.06      28.41%
  2/23/99   180 Chevron       79.17     97.25      22.84%
  2/20/98   260 DuPont        58.84     71.69      21.83%
  2/23/99   290 Goodyear T    48.72     57.44      17.90%
   7/2/98   470 Starbucks     27.95     25.06     -10.35%
   1/8/98   425 3Dfx          25.67     14.56     -43.26%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 281875.00  $279875.53
   9/9/97  1320 Amazon.com  8684.60 165660.00  $156975.40
  12/4/98   900 Excite@Hom 25236.13  48431.25   $23195.12
 12/16/98   580 Amgen      24867.50  40201.25   $15333.75
  2/26/99   300 eBay       30158.00  40725.00   $10567.00
  5/17/95  1960 Iomega Cor  2509.60   9187.50    $6677.90
  2/23/99   300 Caterpilla 14089.25  18356.25    $4267.00
  2/20/98   260 DuPont     15299.43  18638.75    $3339.32
  2/23/99   180 Chevron    14250.50  17505.00    $3254.50
  4/30/97 -1170*Trump*     -9908.50  -7093.13    $2815.38
  2/23/99   290 Goodyear T 14127.38  16656.88    $2529.50
   7/2/98   470 Starbucks  13138.63  11779.38   -$1359.25
   1/8/98   425 3Dfx       10908.63   6189.06   -$4719.56

                              CASH   $9924.87
                             TOTAL $678037.06
 
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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