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Analysis: Cash Flow Improves, Station Stock Jumps

30 October 2002

by Liz Benston

LAS VEGAS -- Amid a broad market decline, shares of neighborhood casino operator Station Casinos Inc. jumped about 7 percent in early trading today as the company more than doubled its operating earnings per share for the third quarter.

Company watchers attributed the boost to cost-cutting initiatives and an improving outlook for the locals' gambling market in Las Vegas.

The company reported operating earnings per share of $7.3 million, or 12 cents per share -- beating Wall Street analysts' average estimate by a penny. For the year-ago quarter, the company earned $3.4 million, or 6 cents per share.

Non-recurring items include $1.4 million for a loss on early retirement of debt and $1.1 million in costs related to a patent litigation suit filed last year against Station Casinos by Harrah's Entertainment Inc. Including these items, the company earned $5.7 million, or 9 cents per share, for the third quarter. That compares to $4.6 million, or 8 cents per share, a year ago.

The expense for the litigation, which is still pending, includes attorney fees. Station Casinos hadn't detailed litigation costs for prior quarters but decided to explain it better for investors because the figure is growing, the company's Chief Financial Officer Glenn Christenson said.

The company said it expects to earn 17 cents per share in the fourth quarter -- a penny higher than analysts' average estimates -- and about $1 to $1.10 per share for all of 2003. That includes the contributions of $15 million to $25 million in management fees from a tribal casino planned near Sacramento, Calif., and excludes the effect of certain non-recurring items, the company said. The company also forecasted cash flow of $60 million for the fourth quarter and roughly $270 to $280 million for next year.

Analysts have not yet included in their estimates the effect of Thunder Valley Casino, a Station Casinos-managed tribal casino that recently won a legal battle that allows it to proceed construction near a busy highway linking Lake Tahoe with San Francisco. Excluding that project, analysts said the company's guidance was in line with their estimates.

Steven Kent, a casino industry analyst with Goldman, Sachs & Co., wrote in a research note today that the company's earnings per share growth will accelerate due to the California casino contract and continued growth in the Las Vegas locals' market.

"Additionally, our basic thesis that (Station Casinos) should grow over an extended period from increasing population in Las Vegas, margin growth due to economies of scale and improved technology coupled with a lack of new gaming supply due to legislative constraints remains intact," Kent wrote.

Revenues for the third quarter declined 8 percent, to $194.5 million. Cash flow, excluding certain non-recurring items, increased 16 percent to $55.1 million.

Cash flow -- typically defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of casino performance.

The revenue decline was primarily driven by the fact that Green Valley Ranch Station, which opened in December in Henderson, cannibalized some business from its existing Sunset Station casino nearby, Christenson said.

The company's total revenue figure doesn't include revenue from Green Valley Ranch Station, from which the company receives a management fee and half of the casino's operating income, Christenson said.

Both Green Valley Ranch and Sunset Station are still performing well, he said.

Excluding Green Valley Ranch, revenues at all Station-owned properties open during both third quarter 2002 and the year ago period actually increased 7 percent, despite the overall revenue decline for the period, he said.

"In this environment we think that's pretty good."

The cash flow increase is a sign that the company is making strides to improve efficiency, some analysts noted.

"This disparity in revenue and (cash flow) changes highlights the tremendous amount of costs Station has removed from its operations as it continues to fine-tune its promotional, purchasing and labor expense structure," Bear, Stearns & Co. gaming analyst Jason Ader wrote in a research note today.

Cash flow at the company's big Las Vegas properties open for more than a year increased 7 percent in the third quarter, to $54.6 million, compared to third-quarter 2001.

That figure includes casino preopening expenses from the third quarter of 2001 as well as a loss on the sale of Southwest Gaming and a loss on the sale of land parcels from that quarter last year. Taking away these factors leaves investors with a truer sense of the cash generated by the properties, Christenson said.

Cash flow at other properties, including Wild Wild West, Barley's, its Southwest Gaming investment sold in September 2001 and its newer Green Valley Ranch Station, posted a loss of $4.7 million, reduced 67 percent from a loss of $7.1 million in the year ago quarter.

Green Valley Ranch Station generated $3.7 million in third-quarter earnings for Station Casinos. Earnings represent a combination of Station Casino's management fee plus 50 percent of the casino's operating income. In total, the property generated cash flow of $9.8 million for the quarter, excluding $1.1 million in management fees. The property is part owned by the Greenspun family, which owns the Las Vegas Sun.

The cash flow increase is a sign that the company is making strides to improve efficiency, analyst said.

"This disparity in revenue and (cash flow) changes highlights the tremendous amount of costs Station has removed from its operations as it continues to fine-tune its promotional, purchasing and labor expense structure," Bear, Stearns & Co. gaming analyst Jason Ader wrote in a research note today.

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