Gaming Seen to Suffer After Storms

14 October 2005

by Rod Smith

LAS VEGAS -- Gaming company third-quarter earnings are being pounded by the devastation of hurricanes Katrina and Rita, although the effect is likely to wash out in the long run, analysts said Thursday.

Further, Deutsche Bank analyst Marc Falcone said, despite new guidance from the companies, "earnings could be messy over the near term and possibly impacted for the next 12 (months) to 24 months."

Most casinos on the Mississippi Gulf Coast were significantly damaged and out of commission for at least a third of the quarter, so Deutsche Bank eliminated from its estimates cash flow for that period and going forward.

However, the financial company expects much of the earnings shortfalls will be made up in later quarters once companies begin collecting business interruption and damage insurance.

Brian Gordon, a partner in Applied Analysis, a Las Vegas-based financial consulting firm, said such uncertainty is commonplace following a catastrophe.

"It takes time to get a handle on events, and the issues involved can impact financial performance on paper for a long time to come," he said. "(However) accounting and bookkeeping don't always follow the economics or fundamentals of the business, such as write-downs of assets. When Harrah's (Entertainment) takes about a $10 million charge, it's outside the scope of their continuing operations which are the basis of the value Wall Street places on them."

Bear Stearns gaming analyst Joe Greff also warned investors in an advisory that the third quarter could be "a bit noisy" with charges related to Katrina. But he added that core operating fundamentals will be solid and the 2006 outlooks should be robust.

Gaming assets on the Gulf Coast were hit hard when Hurricane Katrina devastated the Mississippi Gulf Coast and New Orleans at the end of August, and Hurricane Rita struck Lake Charles less than one month later, Deutsche Bank said in a report to investors this week.

Accounting for the extent of the devastation, Deutsche Bank adjusted its previous earnings estimates downward for several major operators, including Boyd Gaming Corp., Harrah's Entertainment, Penn National Gaming, Pinnacle Entertainment and MGM Mirage.

Deutsche Bank estimates Pinnacle sustained the heaviest hit in the third quarter, adjusting its earnings per share down 76.5 percent from 17 cents a share to 4 cents a share.

Falcone said Pinnacle had three properties in the region that accounted for 55 percent of its total cash flow.

Harrah's sustained the second-toughest toll, with earnings estimates cut 14.3 percent to 96 cents a share from $1.12 per share.

"While Harrah's may have the most exposure in terms of the number of properties and total dollar amount of cash flow in the Gulf region, the impact for the company is not significant as a percent of total cash flow," Falcone said.

MGM Mirage's earnings per share were cut to 37 cents from 42 cents; Penn National's were cut to 32 cents from 37 cents, respectively.

Of all the operators, MGM Mirage had the least exposure to the hurricanes since Beau Rivage accounted for only 4 percent of its total cash flow, Falcone said. Similarly, Penn National's affected properties accounted for 6 percent of Deutsche Bank's pre-hurricane forecasts.

And Deutsche Bank cut its estimates for Boyd Gaming's earnings per share 10.7 percent to 50 cents from 56 cents.

"In all likelihood, operators will start getting business interruption insurance in the fourth quarter, which would add upside to our forecasts," Falcone said.

"And we believe gaming operators will also take a series of one-time charges, not included in our numbers, which could include insurance deductibles, charitable contributions, employee cost and other hurricane expenditures," he said.

"While these estimates could still potentially change, we thought it could be useful to forecast a base case for the impacted casinos, giving investors an idea of the "worst case" scenario," Falcone said.

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