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GHOUL TAKE
- ONE GHOUL'S
OPINION*
Greate Bay Casino
Corp. Last Halloween, I wrote about a distressed casino stock that I thought had one long year ahead of it. That stock, STRATOSPHERE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWVQ)") else Response.Write("(Nasdaq: TOWVQ)") end if %>, got three-quarters of its value chain-sawed to bits this past year, and I think the company's stock has a good chance of going to the goose-egg graveyard. This year, I offer up a stock that strikes me as being in a similar situation, with vats of red ink, an onerous debt load, minimal cash flow, and a resort that is badly in need of an upgrade. This year's trick is GREATE BAY CASINO CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GBY)") else Response.Write("(AMEX: GBY)") end if %>. The company receives the lion's share of its revenues from the Sands casino in Atlantic City. Don't let the name deceive you, there is nothing great about the company. To say the company's income statements are bloodied with the color red would be an understatement. We are talking downright gory here, Fools. In the first six months of the year, the company has lost $1.09 a share. Since the company's inception, it has racked up an accumulated deficit of roughly $203.7 million. What about book value? Try not to scream when I tell you it is roughly *negative* $29 a share. Would you trust your money to management with such a track record? That would be scary. These losses over the years have certainly had their effect on the balance sheet. Here's a highly condensed version of the company's June 30, 1997 cash position: (millions)
Cash $24.0
Current Assets $42.8
Total Assets $216.9
Current Liabilities $48.3
Long Term Debt $316.2
Having negative working capital and more debt than assets is a pretty darn frightening situation. The company is on track to have cash flow from operations of roughly $40 million this year. However, all but a few million of that will go straight towards paying the interest on the debt. This is not nearly enough cash flow to pay back any meaningful principal on the debt, let alone upgrade the resort to meet the increased competition expected in Atlantic City in the near future. Companies with high debt and low working capital, such as Greate Bay, tend to try to conserve cash at all costs. This means putting off repairs, upgrades and improvements unless it is absolutely necessary. And when a casino starts to lose some of its glitter, the gamblers tend to stay away. Anecdotal reports from visitors to the resort confirm that the Sands is looking more rough around the edges than it ever has before. It appears that the Sands has definitely lost some of that all-important glitter, for its gaming win numbers are also trending down. Through July, Greate Bay's year-to-date gaming revenues in Atlantic City have been down roughly 3%. To compare, the rest of the city has seen more than a 3% rise in gross receipts year-to-date. A downtrending market share is rarely a positive occurrence, especially for a company staring the beast of insolvency in the face. Greate Bay has plans to upgrade the Sands to a Hollywood-themed resort. With direct competition in the "Hollywood" segment of the market expected down the boardwalk from the much better funded ITT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITT)") else Response.Write("(NYSE: ITT)") end if %> and PLANET HOLLYWOOD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHII)") else Response.Write("(Nasdaq: PHII)") end if %>, I've got to wonder if such a transformation will yield the desired results or if it will look like a cheap rip-off. More importantly, I've got to wonder where Greate Bay expects to get the cash for this capital project (or any capital project, for that matter). Some Greate Bay bulls in the past have pointed to the land the Sands sits on as being potentially quite valuable to a casino company looking to expand its presence in the Atlantic City market. While the land may have some value to it, it is highly doubtful that any of the proceeds from the sale of Greate Bay's assets would make it past the bondholders and into the pockets of the stockholders. The debt the company has rung up simply exceeds its potential liquidation value. In short, I think that stockholders in Greate Bay should be afraid... very afraid. Happy Halloween! * A Ghoul Take represents the opinion of one Ghoul and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Ghoul's thoughts. Next: Trick: Quigley Corp.
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