Harrah's: The House Wins


Harrah's Entertainment (HET) has rolled the dice on expansion and acquisition over the past few years -- and the bet is starting to pay off. That kind of aggressiveness has industry watchers thinking investors could hit the jackpot with the company's stock, which is up some 40% so far in 2001. On June 15, it closed at $37.82, just off its 52-week high of $38.29.

In the past few years, the No. 2 casino gaming company -- behind Park Place Entertainment (PPE) -- spread into markets outside of Las Vegas and Atlantic City while restructuring underperforming operations. Harrah's now rakes in more money from its riverboat operations in Mississippi, Missouri, and New Orleans than it does from either Las Vegas or Atlantic City. The company owns or operates 21 properties: 6 in Nevada, 2 in Atlantic City, 1 in New Orleans, 9 riverboat casinos, and three tribal casinos which it manages in Arizona, North Carolina, and Kansas.

BROADER HORIZONS. Thomas Graves, an analyst at Standard & Poor's, says this diversity is key to the company's success, especially because it's a hedge against local and regional economic slumps. "They've made smart acquisitions in the past three or four years, with Showboat, Players International, and Rio." For example, the Players International acquisition allowed Harrah's to enter western Louisiana and expand its presence in Illinois and Missouri.

In Las Vegas, The Rio Casino increased the company's profile in the nation's largest market. Then there's the pending acquisition of Harveys Casino Resorts, which will give Harrah's a presence in Iowa courtesy of a riverboat casino, Colorado with a land-based casino, and add to its operations in Lake Tahoe.

These venues could help soften the blow of a depressed market in northern Nevada. According to the company's first-quarter earnings report for the region, "tracked" play was about even with last year's first quarter, while walk-in business declined. Harrah's Reno reported 9.7% lower revenues and a 54.9% decline in property earnings before interest, taxes, depreciation, and amortization (EBITDA). The company's Lake Tahoe properties posted revenues approximately the same as in last year's first quarter, but earnings declined 12.8% before EBITDA.

RECESSION IMMUNITY. The decline in northern Nevada is believed to be a result of high energy and gasoline prices, as most gamers in that region drive to Reno or Lake Tahoe from central or Northern California. Gary Loveman, Harrah's' president and chief operating officer, is quick to point out, however, that business in other regions is going quite well. "We're really not experiencing the effects of a sluggish economy as are other [industries]," he says. "If you look at our performance in places like Missouri or Chicagoland [where the company operates the Harrah's East Chicago Riverboat Casino] or a lot of these other destinations, times are really quite good." Daniel Davila, an analyst at Hibernia Southcoast Capital, agrees: "The gambling aspect of entertainment has always been relatively resistant to economic pressures," says

In fact, the gaming sector overall has been doing well so far this year. The Gaming, Lottery, & Parimutuel Company Index, which is made up of gaming companies within the S&P 500, Mid-Cap 400, and Small-Cap 600 indexes, is up 27.8%, vs. a 2.6% loss for the S&P Supercomposite 1500. Loveman points out that typical casino visitors are older, upper-middle-class people who aren't especially vulnerable to modest changes in the economy. "People like your parents or my parents aren't out buying washers and dryers, new houses, and cars and all that stuff," he says. "Their economic circumstances are pretty secure."

SOLID GROWTH. Last year, casino-gaming revenues in the U.S. (excluding casinos located on Native American reservations, which often are not required to disclose revenues) totaled $26 billion. That was a 9.7% increase above 1999 levels. This year, analysts are targeting an approximate 6% increase in casino-gaming revenues -- slower growth, but growth nonetheless. This is despite the fact that virtually no gaming company has added new capacity thus far in 2001.

Since casino patrons remain mostly unfazed by economic conditions, Harrah's has been reaping the rewards. Casino revenues for 2000 from the western region totaled $726.8 million. For the central region, where the company's riverboat operations are located, revenues totaled $1.38 billion. Revenues for the eastern region were $743.3 million. And on Apr. 18, the company beat analysts' expectations by reporting a 43% increase in first-quarter earnings, to $44 million, or 38 cents a share, vs. $30.7 million and 25 cents in the year-ago period. First Call estimated earnings per share of 37 cents. Revenues for the quarter totaled $899.53 million, 15.3% higher than the same quarter last year.

By comparison, industry leader Park Place Entertainment posted first-quarter earnings of $45 million, or 15 cents per share on revenues of $1.19 billion.

RIVERBOATS AND RED INK. Harrah's has occasionally seen the dice get cold, however. Until recently, it was crapping out with its New Orleans joint venture and Rio Hotel in Las Vegas -- both of which hurt the company's bottom line last year. JCC Holding Co., the joint venture that owns Harrah's New Orleans riverboat casino, had been a money pit, losing well over $100 million last year, roughly $50 million of which trickled down to Harrah's. The New Orleans operations punished the bottom line last year. For 2000, Harrah's reported a loss of $12.06 million, or 10 cents per share, compared with earnings of $1.62 per diluted share in 1999.

But after two bankruptcies and reorganizations, JCC Holding received tax cuts from the state and city and now is on a footing to "at least break even if not make a little money," according to Dennis Forst, a gaming analyst at McDonald Investments Inc. Since the reorganization didn't take place until the second quarter, Harrah's is expected to lose roughly $10 million on the partnership, but is projected to earn $10 to $20 million from the operations in 2002.

The Rio Casino operations are slowly being turned around as well. "We had in 2000 a very tough time with that business, but we have things off to a better start in 2001," says Loveman. He says fierce competition hit the Rio hard, with the opening of several elaborate resorts in Las Vegas, some of which were targeted right at Rio customers. "So Rio really had a tough time as people experimented with new facilities."

WEB WAGERS? Forst, for one, is still willing to bet on Harrah's stock. He maintains an aggressive buy rating and has a 12-month price target of $45. With its aggressive strategy and willingness to move into nontraditional areas, online gaming could be the next step for Harrah's Entertainment -- provided complicated taxation and regulation issues can be worked out. Then, "we would participate," says Loveman.

It would seem a logical move: Internet gambling revenues could reach $2.3 billion by the end of the year, estimates Christiansen/Cummings Associates, a New York-based research firm. Now it's offshore, unregulated companies who operate Web wagering.

Harrah's has rolled snake eyes in the past, but now it's ahead of the game, with most of its operations either running profitably or expected to do so in the near future. Lady Luck seems to have smiled on the company -- and may do so on investors as well. By Alan Hughes in New York


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