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Harrah's Stock A Bad Gamble

Posted: Nov 12, 2007 07:21 AM by Glenn Curtis

Tickers in this Article: WYNN, MGM, HET

In the face of a slowing economy and the fact that consumers are generally less willing to part with their cash these days, casino and hotel operator Harrah's Entertainment (NYSE:HET) has still fared quite well. The stock is trading right near its 52-week high.

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However, despite its recent success, I think that the shares are a bit too risky at these levels.

Don't Bet The Farm Just Yet
I'm not overly impressed with the casino's third-quarter results. It's great that the company was able to show a roughly 13% year-over-year improvement in revenue (to $2.8 billion from $2.5 billion). However, it's apparent that those results contained two unique items that it didn't have in the comparable period last year: Bill's Gamblin' Hall & Saloon, which it acquired and then opened in the first quarter; and Chester Casino and Racetrack in Pennsylvania, a facility that it opened in Q4 2006.

Even beyond the fact that these two items were lumped in, there are questions about what is going to happen next year. When a new gaming facility opens or an existing one comes under new management, people tend to flock to it just to check it out and see what's new. Trouble is, after the novelty wears off foot traffic declines.

This leads me to my next point - potential competitive forces. MGM Mirage (NYSE:MGM) is in the process of constructing a roughly $5 billion gaming facility next to Borgata in Atlantic City, which is just a hop, skip and a jump away from the Pennsylvania border. The project is still in its early stages and the facility isn't expected to have horse racing facilities, but it is still likely to draw gamblers away when it opens its doors. (For more coverage on MGM's Atlantic City foray, see MGM Mirage's Atlantic City Excursion Makes Sense).

Another problem is that rival casino operator Wynn (Nasdaq:WYNN) is planning on opening a large facility in Vegas in 2009 called the Encore. This, too, could draw foot traffic away from the company's properties.

Despite the new facilities coming on line, the company still fell short of analyst expectations - expectations i felt were quite reasonable. During the quarter, adjusted earnings came in at an even $1 per share, which was better than the 94 cents a share it posted in the year ago quarter, but below the roughly $1.01 to $1.05 per share that some analysts had been expecting. I think that this shortfall could lead to some profit taking in the weeks ahead.

Now to be clear, there are probably investors out there who wonder why we should care about this news. After all, late last year the company issued a press release stating that it agreed to be acquired by Texas Pacific Group and Apollo Management for $90 a share. And the deal could close by Q1 of 2008 or even sooner. However, here’s why we should care….

There’s always a chance that the deal could somehow get stymied and the company could remain a standalone. Also, some investors are still playing the stock ahead of the transaction in hopes of arbitraging the deal.

The Bottom Line
Harrah's has fared well lately, but its third-quarter results and outlook going forward is a mixed bag in my opinion. Despite the upcoming transaction and the possibility that investors might make a couple of bucks a share if it goes through, I don't think the stock worth the risk.

For related reading on investing in casinos and other sinful stocks, see A Prelude To Sinful Investing.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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