S&P: Hurray for Harrah's

07/04/2003 12:00 am EST


"We think Harrah's Entertainment remains the best bet in the casino industry," notes S&P’s The Outlook. Senior stock analyst Kevin Gooley continues, "The stock carries Standard & Poor's highest investment recommendation and is rated a ‘strong buy’, thanks to strong performance and an undervalued stock." Here's the service's review.

"Harrah's Entertainment (HET NYSE) has become the most geographically diversified casino company in North America. It operates or has ownership interests in about 26 gaming properties, including seven in Nevada and two in Atlantic City. Harrah's also operates casinos on boats or barges in such areas as Illinois, Mississippi, Louisiana, Missouri and Indiana. In addition, Harrah's now has a 100%-ownership interest in and manages a land-based New Orleans casino that opened in 1999. Harrah's is also represented in the growing business of gaming facilities operating on Native American land. And Harrah's recently entered a new segment, ‘racino’ gaming, as its majority-owned Louisiana Downs racetrack has added slot machines.

"After all capital spending, we look for Harrah's to produce close to $210 million of free cash flow in 2003 (approximately $1.95 a share), and we expect that some of it will be used for debt reduction and stock repurchases. We project earnings per share of $2.90 in 2004, rising to $3.23 in 2005, and look for free cash flow to exceed $200 million in both years. In both the second half of 2003 and in 2004, we expect growth in earnings and cash flow to be limited by higher taxes on casino winnings. For example, in Illinois the legislature recently approved higher tax rates. Also factored into our earnings estimates is the prospect that New Jersey will be imposing higher taxes on casinos. Geographic diversity, however, should provide some insulation from tax-rate hikes in individual gaming markets.

"We view Harrah's balance sheet and expected cash flow as sufficiently strong to support both future profit growth and a return of cash to shareholders in the form of stock repurchases or a dividend. Its rising cash flow may also be used to buy back more stock. We would also not be surprised if Harrah's starts paying a cash dividend of about 15 cents a share quarterly. Based on the current stock price, this would be an annual yield of 1.4%. Our long-term discounted free cash-flow model gives us an intrinsic value for the stock of approximately $49 a share. Compared to stocks of major gaming companies that we cover, Harrah's is selling at a discount. Based on 2003 earnings estimates, it has a p-e of 14, vs. an average multiple of 20 for its peers. Overall, in the gaming sector, we believe Harrah’s is the bargain of the bunch."

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