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Station Casinos Bets on Las Vegas Growth

LAS VEGAS -- Station Casinos executives delivered a message Tuesday in announcing the company's second-quarter performance: What's good for Las Vegas is good for Station Casinos.

Cautious about short-term prospects for the Las Vegas economy, Station Casinos executives believe the valley's long-term future is bright. Earnings figures announced for the quarter ended June 30 supported their assessment.

Station reported net income of $8 million, or 13 cents per share, a 110.5 percent increase compared with net income of $3.8 million, or 6 cents per share, in last year's second quarter.

Revenue dropped to $199.6 million from $212.8 million, a 6.2 percent decline, more than offset by an 8.1 percent decline in expenses, to $162 million from $176.3 million.

Operating cash flow, defined as earnings before interest, taxes, depreciation and amortization, was up 3.1 percent, to $60.3 million from $58.5 million.

The 5.9 percent Las Vegas unemployment rate and rising electricity costs are all continuing short-term problems, Station executives said.

The company expects to spend $2 million more on electricity during the third quarter than it did during last year's quarter and also anticipates some decline in customer spending because of their own increased power costs.

"The locals market is showing improvement, but it's not fully recovered," Station Chief Financial Officer Glenn Christenson said during a Tuesday conference call. "It's still a little soft here. But absent some new national calamity, we think things will improve in Las Vegas."

Las Vegas consumers still lack confidence, he added, but Station Casinos stock is an investment in Las Vegas' continuing growth. The valley's growth continues and the local economy is slowly rebounding from the business decline that followed the Sept. 11 terrorist strikes, positioning Station to capitalize when the market recovers, the executives said.

But the markets gave executives negative feedback as Station shares closed Tuesday at $12.25, down $2.00 on the day, a 14 percent drop.

"We're in a bear market," said Bear, Stearns & Co. casino industry analyst Jason Ader. "Nobody doubts that long-term prospects for the Las Vegas locals market are strong. But the attention span of the investing public is short."

And that short attention span is focusing on Station's near-term prospects, he said, with stock market drops compounding consumers' short-term anxiety.

"The stock market decline has provided a meaningful reduction in peoples' net worth," he said. "We're seeing a slowdown in spending nationwide, and that will also affect the casino business. Station's customers are going less, and when they do go, they're spending less."

Deutsche Banc Securities casino industry analyst Marc Falcone said Wall Street insiders expected slightly better quarterly results from Station.

"They thought Station management was being extremely conservative with their earnings guidance," Falcone said. "Investors' focus is short term rather than long term. They're looking at quarter by quarter results, and that's why the stock dropped (Tuesday)."

Station's long-term prospects are good despite investors' indifference, he said, noting that the company's business model should succeed well into the future.

He cited Station's Monday announcement of a $65 million deal to acquire a prime casino-zoned site in Summerlin as an example.

"It's a very strong site, probably the best in the Las Vegas locals market," Falcone said. "This could be one of their best performing assets, and this is a property that will take business away from rivals rather than cannibalizing business from their own properties. I think this site will be even better than Green Valley Ranch."

"The Summerlin site is an A+ site, the premier site in Las Vegas," Christenson said.

Station executives said Tuesday that Green Valley Ranch operations exceed expectations.

Although Station had to take a $700,000 write-off of its investment in Green Valley Ranch's now-closed Border Grill, the rest of the property is thriving, Christenson said.

"Green Valley Ranch had less of an impact on Sunset Station than we anticipated," he said. "These strong results at Green Valley Ranch make us even more confident in our ability to grow the market by building quality product."

But it is the growing Las Vegas population base that makes company bosses so confident in their business model.

"At the current rate of growth, Las Vegas will have 2 million people by 2010," Christenson said.

Station is ideally poised to capture the new residents' business, he said, adding that his company controls almost all of the area's undeveloped locals casino sites, and that Senate Bill 208, the Nevada law that restricts the growth of casinos near residential neighborhoods and schools, limits possible sites for competitors.

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