Markets & Finance

An Attractive Gaming Play


By Thomas Graves Standard & Poor's Focus Stock of the Week is Park Place Entertainment (PPE), which carries S&P's highest investing ranking of 5 STARS (buy). Park Place is a major owner and operator of casino/hotels in Nevada, Atlantic City, and Mississippi, and also has gaming interests elsewhere.

In December 1998, ownership of Parl Place was spun off to stockholders of Hilton Hotels Corp. Almost simultaneously, the company acquired Grand Casinos, Inc., which owned three casino/hotels in Mississippi. Also, in December 1999, it acquiried major gaming company Caesars World, Inc., and certain other gaming interests, for $3 billion.

In Nevada, Park Place owns and operates five casino/hotels in Las Vegas, including Caesars Palace, Paris, Bally's, the Flamingo Las Vegas, and the Las Vegas Hilton properties. It also has gaming properties in Reno, Stateline and Laughlin. In total, its Nevada properties have more than 18,500 rooms (or suites), and more than 650,000 square feet of casino space.

In Atlantic City, the company owns and operates Bally's Park Place Casino-Resort, the Atlantic City Hilton Casino Resort, Caesars Atlantic City, and the Claridge Hotel & Casino. The four properties have a total of about 3,700 hotel rooms or suites, and 403,000 sq. ft. of casino space. In Mississippi, the company's Grand Casino Tunica has about 1,356 hotel rooms and 140,000 sq. ft. of casino space. In northern Mississippi, PPE owns and operates Bally's Saloon-Gambling Hall-Hotel, with about 235 rooms and 40,000 sq. ft. of casino space; and the Sheraton Casino & Hotel, with about 134 rooms or suites and 33,000 sq. ft. of casino space. In southern Mississippi, the company owns and operates both Grand Casino Biloxi and Grand Casino Gulfport, which have a total of about 1,985 rooms and 244,000 sq. ft. of casino space. In Indiana, Caesars Indiana has about 90,000 sq. ft. of casino space. In Louisiana, Park Place has a 49.9% ownership interest in Bally's Casino-Lakeshore Resort.

The company also operates, manages, and/or has equity interests related to casinos in Australia, Canada, Uruguay, and South Africa, as well as certain other gaming operations.

A LOOK AHEAD. We at Standard & Poor's look for Park Place's 2002 revenues to rise modestly from the $4.7 billion projected for 2001. Before pre-opening costs and nonrecurring items, 2002 earnings before interest, taxes, depreciation and amortization (EBITDA) are projected to approximate the $1.1 billion (including corporate expense) estimated for 2001. On the same basis, net income is estimated at $151 million ($0.51 a share), up from the $104 million ($0.35) projected for 2001. Our 2002 EPS estimate includes a benefit of about $0.16 a share from an expected change in the method of accounting for non-cash goodwill expense.

In 2002, excluding pre-opening expense and non-cash items, about 38% of Park Place's earnings before interest, taxes, depreciation and amortization (EBITDA) is expected to come from the company's Western Region (largely Las Vegas); 36% from the Eastern Region (largely Atlantic City); 22% from the Mid-South Region, which includes water-based casinos in Mississippi; and 9% from the international segment. Also, we expect about $58 million of corporate expense.

Recent expansion has included the 2001 acquisition of the Claridge Casino Hotel in Atlantic City. Also, Park Place may be a partner in the development of and the manager of a proposed casino project in New York, in connection with the St. Regis Mohawk Nation. This gaming project, would be located near the Catskills town of Thompson, and would include a 750-room resort hotel and a 130,000 sq. ft. casino. It could be one of six new Native American casino projects in New York.

A sizable room expansion project at Caesars Palace in Las Vegas was recently postponed. However, the company is continuing with its Colosseum project at Caesars Palace, a 4,000-seat concert facility that is expected to open with singer Celine Dion in March 2003. Also, in August 2001, Park Place opened a 500-room hotel tower as part of its Indiana riverboat gaming project.

ROOM TO RISE. In 2001, the shares substantially underperformed both the S&P 400 and the S&P 500 indices. Although it has recently begun to recover from its December 2001 low of $7.70, the stock remains considerably below its June 2001 high of nearly $13.

At its current level, S&P still sees considerable upside for the shares. The company is now being valued at about 7.2 times estimated 2002 EBITDA (after corporate expense), which is at the low end of the range for major gaming companies within S&P's STARS universe. In addition, after maintenance capital expenditures, we look for the company to have about $1.15 a share of free cash flow in 2002. Uses for cash flow could include share buybacks or debt reduction. With long-distance travel and the U.S. economy expected to improve, we expect Park Place shares to increasingly appeal as an attractive cash flow story.

Our six-to-12 month target price for the stock is $12, or about 20% above its current level. This target represents a multiple of about 10.4 times estimated 2002 free cash flow per share, and an enterprise value of about 7.7 times projected 2002 EBITDA. We recommend buying the stock for capital gains. Graves is an equity analyst covering the gaming industry for Standard & Poor's


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