Station's Earnings Slump

LAS VEGAS, Nevada -- Station Casinos said Tuesday that expenses from maintaining its real estate holdings, an ongoing stock repurchase program, American Indian gaming opportunities, and ongoing projects dragged down earnings in the second quarter.

Despite a 25 percent jump in net revenue, the Las Vegas-based casino operator said Tuesday its net income in the quarter that ended June 30 was $26.8 million, a 34 percent decline compared with $40.6 million for the same quarter last year.

Earnings per share in the quarter were 44 cents, down from 58 cents per share in the second quarter of 2005. Adjusted earnings were 61 cents per share, below the average expectation of 63 cents per share by analysts polled by Thomson First Call.

Station Casinos management didn't view the earnings per share as negative.

"The business model for our company is based on people moving to Las Vegas," company Chief Financial Officer Glenn Christenson said. "As long as that continues to happen, we win. The local's market matrix is very strong and the economic indicators are still doing well. We know there are higher gas prices and higher interest rates, but we have not seen any impact on operations."

Revenue in the quarter, which included 73 days of operations from the new Red Rock Resort in Summerlin, was $341.8 million, compared with $274 million for the same quarter a year ago.

In Las Vegas, Station Casinos said its major properties, excluding Green Valley Ranch Resort, had revenue of $305.3 million, a 28 percent increase from $238.7 million a year ago. Green Valley Ranch Resort, in which the company has 50 percent ownership interest, reported revenue of $63 million, up 10 percent from $57.2 million last year. The company's earnings from the joint venture was $11.5 million and included its management fee and a share of the operating income.

Station Casinos did not break out the results for individual properties.

Wall Street analysts had a mixed reaction to the company's earnings report. Some thought the news called into question the vibrance of the resident market. Others used the term "robust" when describing the locals-oriented gaming community, which is still absorbing both the $925 million Red Rock Resort and the 8-month-old, $600 million South Coast, which Boyd Gaming announced Tuesday is being sold to former Coast Casinos Chairman Michael Gaughan.

"Overall, we thought the quarter was somewhat disappointing as revenues were below guidance, indicating to us that it is taking longer for the Las Vegas locals market to absorb new capacity," Goldman Sachs gaming analyst Steven Kent said in a note to investors. "In addition, the lower earnings per share outlook raises some questions about the interest rate strategy. Finally, investors may be questioning the value of the share buyback considering the expense."

During the quarter, Station Casinos repurchased 6.3 million shares of the company's common stock, completing a previously authorized stock repurchase program. The board of directors recently authorized management to repurchase up to another 10 million shares of the company's common stock.

"We buy back stock because that's a bullish sign," Christenson said. "We've bought back about 15 percent of the company in the last few years."

Conversely, CRT Capital Group gaming analyst Steve Ruggiero said fellow analysts might reduce their stock price targets for the company, which would create opportunity.

"Investors should take advantage of the negative press and knee-jerk reaction and buy Station Casinos common stock," Ruggiero said.

Meanwhile, stock investors weighed in by sending the company's price per share to its lowest level in 52 weeks.

Earnings were announced before the opening of the New York Stock Exchange and shares initially fell almost 8 percent. By the end of the day, Station Casinos' stock price regained some luster, closing at $56.95, down $2.95, or 4.92 percent. More than 8 million shares were traded during the session, eight times the normal average daily volume.

In April, shares of Station Casinos hit a 52-week high of $81.46.

Company executives were undaunted by questions from analysts during Tuesday's hourlong conference call with investors, saying results from Red Rock Resort are meeting expectations.

"In three years, the area surrounding Red Rock will have more homes, retail and businesses," Station Casinos Chairman Frank Fertitta III said. "The market takes about a year to absorb a new property and we're happy with the property's performance so far."

Red Rock Resort's unveiling costs accounted for the bulk of the company's $13.6 million in preopening expenses, which affected earnings per share. While not itemized, the costs included Red Rock's opening night VIP party, which included a performance by rock music icon Sting, and expenses leading up to completing the resort.

"We served 62,000 meals before we even opened the doors to the public," Christenson said. "We stayed in each guest room three times so there were no surprises. We had significant costs to make sure we had a proper introduction to the property."

Christenson said Station Casino controls 672 acres of undeveloped land in Nevada for potential casinos sites, including two parcels in Reno. Last September, in a filing with the Securities and Exchange Commission, the company valued 489 acres it owned at more than $1.3 billion.

Fertitta said that as Las Vegas' population grows, the company is in good shape to capitalize.

"There aren't many more casino sites available and we own the majority of those sites going forward," he said.