Post of the Day
April 14, 1998
From our AOL
Trump Hotels & Casinos Board
Subject: What's it Worth?
A number of posts by DJT bears (are there any bulls left out there?) have raised the issue of whether DJT could possibly fall to $0. As a longtime bear myself, I doubt that will happen, barring a significant downturn in the overall Atlantic CIty market. At a certain price - say $2-3 per share - it will be worth it for a skilled operator to completely overhaul the company's lamely run casinos, refinance the debt, etc. So I wouldn't count on it going to $0. I do, however, expect that the equity will continue to fall, as the small handful of equity investors with large positions in DJT - Gabelli, Conseco, Dimensional - focus on the weakening fundamentals.
I've looked in the past at the company's 10-K from an income statement perspective. By my estimates, DJT generated about $233 million of EBITDA last year. With $1.8 billion of debt, and public equity value of about $300 million, DJT trades at about 9 times 1997 EBITDA, which is more expensive than any gaming company I know of. In 1998, revenue is already down more than 6%, or $20 million, and I expect a weak 1st quarter, continued declines in Gary and serious new competition from Caesars this summer, to lead to a 10-15% drop in EBITDA in 1998. To be generous, let's say DJT does $220 in EBITDA this year.
|What's more likely to happen is that the company continues to lose market share, as its cash-strapped position forces it to defer new projects, cut back on marketing, scrimp on service, etc.|
At that rate, this company could run out of money by the end of 1999 or 2000. How do we get there? Let's look at the company's cash.
As of Jan. 1 1998, the company had $143 million of cash on its balance sheet. Add to that the $220 million of EBITDA, and DJT has $363 million of cash to play with.
What are DJT's cash obligations? While I'm not positive about this, I believe casino regulations require a company such as DJT, with its three AC casinos and one INdiana casino, to keep about $25 million of cash in its cage to pay off customers.With $1.8 billion in debt, I think the company will have about $220 million of interest payments in 1998. In addition, according to the company's cash flow statement, DJT had $29 million of accrued interest payable in 1998, which is money that will have to be spent. Also, DJT has an additinoal $35 million of obligations to build a hotel and other things in Indiana. Finally, most companies spend about 2% of revenue on maintenence cap ex, which in DJT's case would come to an additional $26 million (of course, with the company short of cash, cap ex will likely be deferred, which should only further hurt operations. Therefore, let's assume the company underspends in cap ex and shells out only $20 million). Add up the cash obligations, and we have cash of $363 million and 1998 obligations of $329 million. An economic slowdown here, bad weather in the summer there, and it is conceivable that DJT runs out of cash this year, but not very likely.
|Of course, a sale of the company would make the most sense. A new owner could refinance the debt, put in a real management and make a go of things. The problem is that Trump can't sell the company for $8 per share without a significant blow to his ego and pocketbook.|
What's more likely to happen is that the company continues to lose market share, as its cash-strapped position forces it to defer new projects, cut back on marketing, scrimp on service, etc. That's why an actual default on the debt will probably not happen until 1999 or 2000.
Of course, a sale of the company would make the most sense. A new owner could refinance the debt, put in a real management and make a go of things. The problem is that Trump can't sell the company for $8 per share without a significant blow to his ego and pocketbook. Remember this company was $33 per share recently, and - don't believe the hype - DJT's stock represents the only real hard asset Trump has. He has his name on a lot of buildings in new york, but he doesn't own them. Also, a new owner would have to spend $250 million on refinancing the debt. Also, Trump has numerous enemies in the gaming business, who wouldn't mind seeing him go under. Also, the most likely buyers - REITs - seem to be cooling on the idea of owning gaming companies. Get the idea?
So I think the prospect of DJT going to zero in the near term is slight. I would not be surprised to see it going to $2-$3 per share, as the market realizes the noose is tightening around this company.