Trump Bear's Den
by Paul Larson ([email protected])

Trump is a company that is in dire straits. It is a company with a mountain of debt that faces ever-increasing competitive pressures on all fronts. With the amount of debt the company carries, even the slightest decrease in performance could start the company down a path that could inevitably lead to bankruptcy. Let's first take a look at some of the pressures Trump faces.

Atlantic City as a whole is seeing increased competitive pressures from both the outside and within. First, there is the issue of Trump's neighbors, current and future. There are major expansions planned for many of the Atlantic City casinos including Caesar's, Harrah's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %> and Sun International's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SIH)") else Response.Write("(NYSE: SIH)") end if %> Resorts unit. These are all capacity increases Trump will have to withstand in the next 12-18 months.

Look out further and there are a pair of Deathstars waiting to sap market share away from the current operators. Two of the most respected names in the industry, MGM Grand <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGG)") else Response.Write("(NYSE: MGG)") end if %> and Mirage <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIR)") else Response.Write("(NYSE: MIR)") end if %>, are poised to start construction on mammoth resort hotels in the next year. The two companies are planning on spending a combined $2 billion, yes billion, on their new casinos. There is no doubt that these mega-resorts are going to grow the Atlantic City market as a whole when they open, but it's also a rather safe bet that the relative increase in the size of the pie is going to be significantly less than the increase in capacity. It's also a safe bet that a fair number of gamblers are going to prefer the new, whiz-bang resorts to some of the older casinos in the city, such as Trump's.

Atlantic City is also going to have a difficult time competing with other gaming outlets that are expanding by leaps and bounds in the region. First, there are the tribal casinos in Connecticut that are constantly expanding their offerings. It is arguably more scenic to go to the rural woods of Connecticut than to the Boardwalk. The tribes also have the advantage of having basically an unlimited amount of land to work with. Plus, the tribes are not hampered by the Atlantic City CRDA (Casino Reinvestment Development Authority), which takes in significant funds in taxes and largely dictates what can and can't be built in the city. In other words, the tribes are the "low cost" producer in the area and are a competitor not to be taken lightly.

Gamblers coming from New York City also have the casino "boats to nowhere" that are now operating off Manhattan. These boats are a small competitive presence, but a presence nonetheless.

Furthermore, there are the Delaware racetracks that recently were awarded an extra thousand machines each to add to the slots already installed in the state. When complete, this expansion will add another 3,000 machines that are closer to Atlantic City's key feeder markets of Philadelphia and Baltimore.

The competition for gamblers in the whole eastern region is increasing, too. No town will ever be able knock Las Vegas off as the gambling King, but several markets could knock off Atlantic City as gambling Queen. Mississippi, with its year-round warmth, is in a hyper-growth phase and attracting gamblers from the South and Midwest. This says nothing of other major cities such as Detroit, Chicago, Cincinnati, and Buffalo that now have local gaming options.

It is true that Trump is not a story completely about Atlantic City, for the company has a casino boat in Indiana. Nevertheless, Trump Indiana is now the lowest earning boat in both the greater Chicago market and the entire state of Indiana. So far in 1998, the company's Indiana boat is taking in about 75% of what it was taking in a year ago. Not exactly a sign of strength.

All these factors combined point to a much darker future for the company. EBITDA interest coverage for the company sat at less than 1.2x in 1997. That is, over 80% of the cash generated from operations went towards paying the interest on the company's debt last year. That's interest, not principal, Fools. And with what appears to be a considerably weaker 1998 ahead for all the reasons I laid out above, that interest coverage could easily dip below one and start the company on the short road towards bankruptcy, a road Trump is all too familiar with.

Even if the company does somehow manage to generate enough funds to pay off its interest, the principle on the debt is still onerous -- $1.8 billion worth of onerous. Furthermore, with so much cash going into interest payments there is a minimal amount of cash left over for capital expenditures. While most of a given casino's construction expense is when it initially opens, a certain amount of reinvestment is needed to keep the hotel and casino looking new and fresh. It's true that depreciation is a non-cash expense, but it is also true that things wear out and need to be replaced or upgraded on a regular basis. To look to another company for an example, where would Disney's Magic Kingdom be if Disney did not reinvest and all the park had today were Space Mountain and Pirates of the Caribbean? A lack of capital expenditures ultimately leads to lower earnings, which is the last thing Trump needs at this point.

In any case, Trump is, arguably, the most leveraged company on the planet. Not only is the casino business inherently leveraged from an operational standpoint, but Trump has also added financial leverage to the company to make one of the most volatile and risky equities around. With a razor thin margin of error and predicted rough sledding ahead, it certainly appears that in the future the leverage is going to hammer the company and, hence, the stock.

Next: The Bull Responds