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April 27, 1999
Harrah's Entertainment for Mom
by Paul Larson
([email protected])
Trading at $22 11/16 as of April 26, 1999
I think I owe you two presents this year, Mom. Last year's choice of Ameristar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASCA)") else Response.Write("(Nasdaq: ASCA)") end if %> proved that your son is anything but perfect, even when looking at casino stocks. It became readily apparent by the end of the summer that Ameristar's new casino in Las Vegas was going to be a financial bomb. Instead of contributing positive cash flow and earnings to the company, the new casino was cash flow negative. Anyway, I think this year you'll be able to watch your present grow slowly and solidly.
This year you are getting Harrah's Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %>, one of the largest casino companies in the nation. You may know, Mom, that they own two riverboat complexes in the Chicago area, but you may be surprised to learn that the company now owns a total of 20 properties around the globe. Harrah's is the only casino company that has a property within a day's drive from anywhere within the lower 48 states. This geographic diversity not only lowers the risk of poor results at one location materially hurting the company (see Ameristar), but it also puts Harrah's in a unique position within the casino industry.
Harrah's is one of the only casino companies able to benefit from using national advertising to promote its brand name. The company has even gone as far as to sponsor Kenny Brack's Indy racing car and Ken Schrader's NASCAR team. Harrah's has always aimed to build a brand that conjures images of both cleanliness and extremely friendly service, and these investments in the brand should continue to pay dividends in the future.
Furthermore, the company has an extremely successful loyalty program, Total Gold. While almost every casino has "slot club" cards that gamblers can earn "points" on, the Harrah's Total Gold system is the only program that allows points to be transferred from one property to another across the nation. For example, those playing at the company's Midwestern riverboats can save their Total Gold points and use them for a free night's stay at a Harrah's in Lake Tahoe or Las Vegas. The Total Gold system has increased play across the entire Harrah's empire, and I think the program will continue to stoke demand for the company.
Simply said, Harrah's is a top-shelf operation in the casino industry. Then again, don't just take my word for it. The company was named to the Forbes 400 Platinum list. It was also named "Company of the Year" by Casino Executive magazine. In addition, the company's CEO, Phil Satre, was named "Gaming Executive of the Year" by the other prominent trade magazine Casino Journal.
Now let's talk about valuation. Even though the stock has run up about 40% since it was featured in the Fool's Industry Focus 1999, it still appears to be a good choice for the long-term investor. Nearly all of the company's units are pleasant and in excellent working order. More importantly, they should continue to churn out positive cash flow for the foreseeable future. The company has to spend very little on building new units and upgrading existing properties since most of the work has already been done. In other words, the positive cash flow and earnings Harrah's generates is relatively predictable and stable.
The company is expected to earn $1.40 per share in 1999 and $1.56 per share in 2000. Having a forward P/E ratio in the mid-teens seems an extremely reasonable price to pay, especially given the exceptional quality of the company. And should Harrah's be able to squeeze some efficiency out of its recently purchased units from Showboat and Rio, those profit estimates may even prove to be a bit too low.
Of course, no investment is without risks. Harrah's did get a black eye down in New Orleans a few years ago when excessive regulation and a poor location turned what was supposed to be a premier casino into a nightmare. After being closed for almost four years now, the New Orleans casino is set to open its doors again later this year. Most (including myself) expect this particular unit to be a wash, but that does not reduce the attractiveness of the company's other 19 casinos.
There's also political and regulatory risk to be taken into consideration. Increasing gaming taxes is an excellent way for politicos to raise funds with little public opposition. And as the company can attest from its experiences in New Orleans, aggressive regulation can strangle profits in a heartbeat.
Even though these risks are real, an investor does not have to worry about short product cycles, research and development, or a lofty valuation. Harrah's hotels and casinos will be just as appealing tomorrow as they are today, and the recurring cash flow those units will produce with minimal further investment is probably the most alluring aspect of Harrah's. This is not a stock that is likely to triple in any given year, but I think you'll enjoy watching it grow steadily in the future, Mom. Happy Mother's Day!
Harrah's Company Information:
Trades on the NYSE under symbol HET
Harrah's website: www.harrahs.com
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Investors Warming Up to Lady Luck -- 2/19/99
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