Majestic Research

Reuters

Harrah's Profit Lags View, Shares Fall

By Paritosh Bansal and Deena Beasley
Published: July 27, 2006

NEW YORK/LOS ANGELES (Reuters) - Harrah’s Entertainment Inc. on Thursday reported quarterly operating profit missed Wall Street’s expectations due to higher expenses, but said net income rose on strong results at its Las Vegas and Atlantic City resorts.

Shares of the world’s biggest casino operator were down 6 percent.

Earnings from continuing operations were 95 cents a share before one-time items, compared with analysts’ expectation, on average, of $1.02 per share, according to Reuters Estimates.

Chief Executive Gary Loveman said planning costs for the redevelopment of its Las Vegas and Atlantic City operations will remain high for the next few quarters, after which yet-to-be-detailed capital spending will kick in.

“Investors are concerned about how much they may spend and what the prospects are for what they are building,” said Matthew Jacob, an analyst at Majestic Research.

He said there was also concern that Harrah’s was focused on capital spending instead of buying back its stock, which has fallen from over $80 to around $60 in the last two months.

Las Vegas-based Harrah’s, which acquired Caesars Entertainment just over a year ago to become the No. 1 casino operator, said net income increased 22 percent to $128.6 million from $105.8 million a year earlier.

Earnings per share fell to 69 cents from 84 cents because of an increase in outstanding shares after stock was issued in June 2005 in connection with the Caesars acquisition.

The company missed expectations due to higher expenses, especially those related to a failed bid for a development in Singapore, Calyon Securities analyst Smedes Rose said.

Expenses more than doubled to $46 million due to option expense and the Caesars deal.  The company recorded $6 million in costs related to the Caesars integration.

“The actual EBITDA by region was pretty much in line with what we thought and better in Las Vegas,” Rose said.

CEO Loveman said Harrah’s was pleased with results in Las Vegas, where basic indicators of demand, including room rates and spending on gaming, continued to move higher.

Loveman said the company will announce details of a new resort in Biloxi, Mississippi, before the end of this year, as well as “master plans” for Las Vegas and Atlantic City.

Loveman explained that Harrah’s plans for Las Vegas include options for a range of markets, rather than the “super-luxury” properties that are currently planned for the Strip, such as the City Center project from MGM Mirage .

Second-quarter revenue rose 67 percent to $2.4 billion, driven by its Caesars properties and increased business from its customer loyalty program.

Sales at Harrah’s properties open for a year or longer—excluding those affected by last year’s U.S. Gulf Coast hurricanes and Caesars properties—increased 5 percent.

Income from operations in the Las Vegas region jumped to $209.7 million from $79.5 million.  In the Atlantic City region, it rose to $124.2 million from $63.8 million.

The company owns or manages more than 40 casinos, mainly under the Harrah’s, Caesars and Horseshoe brands.

The company’s shares were down $3.83 at $60.02 on the New York Stock Exchange.  Before Thursday, the shares had fallen 10 percent year to date, compared with a 10.5 percent gain for the Dow Jones U.S. Gambling Index <.DJUSCA>.