CORPORATE FOCUS—Casino Company Struggles Amid Long Losing Streak

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Summary


Business:

Casino operator


Headquarters:

Glendale


CEO:

Paul Alanis


Market Cap:

$182 million Dividend Yield: N/A*


Total Liabilities:

$574.8 million P/E Ratio: 3.45


Long-Term Debt:

$496.5 million

* Pinnacle Entertainment does not pay dividends.

Though investors have punished Pinnacle Entertainment Inc. after a second quarter earnings warning last month plus other bad news including a freakish ship wreck the dust finally could be settling for the Glendale-based gaming company.

Two weeks ago, Pinnacle’s stock sank to its 52-week low of $6.87, a point it has been sliding toward since reaching its 52-week high of $22.81 last October.

Pinnacle operates seven casinos in Mississippi, Louisiana, Indiana and other states, and it has lease income from two Los Angeles-based card clubs.

While the gaming sector is normally resilient in sluggish economic times, Pinnacle has had an especially rough year, and Wall Street is not being kind.

A failed merger attempt with Colony Capital Inc., the L.A. investment firm headed by real estate investor Thomas Barrack, sent the stock plunging last December. Pinnacle had agreed to be bought by Colony, which controls Harvey’s Casino, for $670 million in cash. But Colony backed out for several reasons, among them the troubled opening of Pinnacle’s Belterra Casino Resort in southern Indiana. The $200 million complex includes Miss Belterra, a riverboat casino that takes gamblers along a rural stretch of the Ohio River 45 miles southwest of Cincinnati.

Miss Belterra was scheduled to begin operations during the peak summer season last year, but a collision with a barge on the Mississippi River prevented her from opening on time. When the vessel finally was operating, bad weather kept gamblers away, and it has suffered losses ever since.

Bruce Hinckley, Pinnacle’s chief financial officer, said the company expects revenues to kick in as promotional programs gather steam next year and more people in Louisville, Cincinnati, Lexington and Indianapolis find out about the property. A recently opened golf course is supposed to help out.

Citing the troubles at Belterra, Pinnacle recently lowered its second quarter estimate to a loss of $4.5 million to $5.5 million. For the first quarter ended March 31, the company reported a net loss of $2.2 million (8 cents per diluted share), compared with net income of $22 million (80 cents) in the like year-earlier quarter. Revenues were $134 million, down from $156.7 million in the like year-earlier quarter.

Pinnacle expects to report second quarter results July 24.

While the gaming sector is often unaffected in economic downturns, that does not seem to be holding true in the Midwest. “The gaming sector has seen a surprising drop-off in revenues,” said Michael Crawford, an analyst with B. Riley & Co.

Among the causes could be the weak manufacturing sector, particularly the automobile industry. Casinos depend on disposable income, something that factory workers could be lacking in down times.

There’s another potential asset in the Pinnacle portfolio that analysts are closely watching. Pinnacle is the frontrunner among three finalists for the 15th and final riverboat gaming license being issued by the state of Louisiana. Pinnacle wants the license for its proposed $220 million casino-hotel resort in Lake Charles. The license will be awarded by the state in August.

With $145 million in cash on its balance sheet at the end of the first quarter, Pinnacle seems well positioned to make the Lake Charles investment. “They could do it without taking on new debt by drawing down on their cash, and they have room on their existing bank line,” Crawford said.

Pinnacle Entertainment was formerly known as Hollywood Park Inc., which sold its horseracing track in Inglewood to Churchill Downs Inc. in 1999 as part of an effort to focus on casinos.

Pinnacle’s woes on Wall Street are part of an industry-wide trend. Rivals like Harrah’s, Aztar Corp., MGM Mirage and Mandalay Resort Group have also been punished by investors, tripped up when Harrah’s announced last week that it too would fall short of Wall Street’s second quarter estimates. The company blamed its shortfall on the economic slowdown, which it said is causing gamblers to cut back.

Hinckley said Pinnacle is not shopping itself around to potential buyers, but is instead focused on the Lake Charles project. “The question is, if we do get the license, will it turn out to be another Belterra problem or a home run? That’s a gamble the investor has to take,” Hinckley said.

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