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Best of Liz Benston

Gaming Guru

Liz Benston

Analysts: Station on Track

20 May 2004

LAS VEGAS -- Station Casinos Inc. executives were met with applause during the company's annual meeting Wednesday as shareholders cheered stock holdings that doubled over the past year -- the highest gain of any major casino company -- and celebrated a slew of upcoming business deals that have earned the adoration of Wall Street.

"Our company is in the strongest position it's ever been in," Station Casinos President Lorenzo Fertitta said.

"There's no other gaming company that has articulated this kind of growth strategy for such a long period of time," Chief Financial Officer Glenn Christenson added. "We think we have the best business profile in the gaming industry."

Gaming stocks as a whole have done well over the past year, with many companies reporting double-digit gains, executives told shareholders. But investors holding Station Casinos stock over the past five years or 10 years, during periods of flux for the gaming industry, would have reaped an impressive 282 percent gain and a 311 percent gain, respectively, they said.

Station Casinos stock rose 101 percent over the past 12 months through Wednesday, to $43.43 per share.

Conspicuously absent from the shareholders meeting at the company's Green Valley Ranch Station casino in Henderson were Culinary Union officials, who showed up last year to criticize and vote against an executive compensation plan designed to grant thousands of future stock options to company insiders. The union, which owns Station Casinos stock through its parent organization, said it was protesting in the interest of shareholders whose returns could be diluted by such grants.

Company executives dismissed the union's efforts as a self-interested move to organize its nonunion casinos but said Wednesday they weren't aware of any overt efforts that have been made since then.

Shareholders approved the reappointment of three directors to the company's board as well as an annual bonus plan for senior executives and the appointment of Ernst & Young LLP as the company's independent auditors for 2004.

The meeting also proceeded without any criticism of executive pay, which emerged as a hot-button issue at many shareholders meetings last year after the stock market slump.

Station Casinos' top executives have emerged as some of the highest paid executives in the casino industry, largely because of stock grants and sales of stock options. Chief Executive Frank Fertitta III earned $28.2 million in total compensation last year, primarily from awards of restricted stock or sales of stock options and including $3.2 million in salary and bonuses.

Christenson earned $18.2 million in total compensation, including $1.1 million in salary and bonuses, and Lorenzo Fertitta earned $9.1 million in total compensation, including $2 million in salary and bonuses.

Executives emphasized the company's earnings potential, saying they expect to develop new casinos that will boost per-share profit by up to 30 percent over the next three years.

The upcoming Red Rock Station casino in Summerlin will cater to about 50 percent more adults per gambling game than its successful Green Valley Ranch Station casino in Henderson with household income statistics that are about 20 percent higher than Green Valley Ranch's surrounding population in Green Valley, Lorenzo Fertitta said.

The Greenspun family, owner of the Las Vegas Sun, is a partner with Station in the Green Valley Ranch property. Construction is under way there on a $110 million expansion that will add about 500 rooms, meeting space and a larger spa by the end of next year.

Red Rock Station is expected to generate up to $65 million in cash flow in its first year and up to $85 million in cash flow by its third year. That compares with about $58 million in cash flow generated by Green Valley Ranch in its second year, up from $43 million in 2002. Green Valley Ranch earned the company $21.2 million in profit in 2003, up from $8.7 million the prior year.

The Red Rock Station property will cost from $450 million to $475 million -- up to $50 million more than Green Valley Ranch.

Outside of Las Vegas, the company expects to develop three more casinos for Indian tribes in California and another in Michigan.

"Our development group is not standing still" and expects to sign future deals with tribes, Fertitta said.

Some financial experts agree with those lofty comments and say that the company's aggressive growth prospects are attainable.

"For a company of Station's size, the projects they have on the docket over the next few years are very impressive," said David Lettenberger, a portfolio manager for U.S. Bancorp's First American Mid Cap Growth Opportunities Fund. "They have some significant company movers over the next three years."

Lettenberger, who manages a $1.5 billion portfolio that includes Station Casinos, said the company is a better overall investment than its much larger counterparts on the Strip.

The largest gaming companies have more recently benefited from an economic rebound that has boosted room rates and visitors, he said.

"While (Strip operators) certainly have growth opportunities beyond just room rate expansion and visitation growth, they are limited. The difference for Station Casinos is (that) ... you just have great visibility on future growth," he said.

Deutsche Bank Securities casino analyst Marc Falcone agreed.

"We know what to expect," from the company, he said. "We have a general sense of timing and new development opportunities."

"Despite the strength of their stock we think Station offers one of the more compelling stories in the industry right now," said Falcone, who has had a "buy" rating on the stock since August 2002.

Station Casinos has wisely focused on two businesses with some of the best growth opportunities and highest returns in the gaming industry -- the Las Vegas locals market and the Indian casino market, he said. The company has also secured most of the available land parcels for future casino development across Las Vegas, he added.

"It's not that their (competitors') business models are unattractive or that (competitors') growth prospects don't exist, but that it requires a lot more capital to produce those growth strategies" than to develop locals casinos or tribal properties, Falcone said.

Few shareholders got to ask questions of top executives before a fire alarm went off in the property's conference area, disrupting public comment and unexpectedly concluding the meeting.

One shareholder asked about possibly expanding the Thunder Valley casino in California, which executives say has operated at near-capacity since it opened last June.

Building a hotel for the casino would make sense but that decision is up to the casino's tribal owners, Frank Fertitta said. Tribal leaders are negotiating with

California Gov. Arnold Schwarzenegger to offer more than the maximum of 2,000 slot machines now allowed under tribal compacts, a decision that could be made by June, he said. Also, the company is conducting an environmental review of land it bought across the street from the casino to prepare it for possible future development.

A gambler who said she suffered from asthma asked about whether the company would consider creating non-smoking areas in its casinos.

Executives said they are building such a room at the Thunder Valley casino they manage for the Auburn tribe and have considered it in Las Vegas, where many customers don't smoke. Non-smoking areas don't yet make business sense, however, because smoking areas tend to perform better, they said.

Analysts: Station on Track is republished from