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Subject: Article from The Street - Place Your Bets on... Date: 8/7/2006 12:03 PM
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RealMoney.com
Place Your Bets on Harrah's
By Charles L. Norton
RealMoney.com Contributor
8/4/2006 3:34 PM EDT
URL: http://www.thestreet.com/pom/pomrmy/10301920.html

This column was originally published on RealMoney on Aug. 4 at 10:07 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.


With shares of Harrah's Entertainment (HET) down some 27% from their May highs, investors may feel like they've been dealt a king-six combo in a game of blackjack. In Harrah's case, it might be worth hitting that. (Full disclosure: The stock is a holding of the Vice Fund (VICEX), which I co-manage.)

The recent streak of bad luck could be attributed, in part, to investor disappointment that the company lost out in May to Las Vegas Sands (LVS) on the bid for Singapore's first gaming license. Considering that management has been vocal about its desire to operate in Asia, the sting of missing out on Singapore was particularly painful.

But there's a second casino site up for auction on Sentosa, a resort island just off the shore of Singapore's main section. There are four major players bidding for rights to develop what's sure to be a major destination for the 8.9 million annual visitors to Singapore, not to mention the 2.5 billion people within a six-hour flight of the city-state.

The competition is fierce for the Sentosa license -- that casino and the Las Vegas Sands project will be the only ones allowed in Singapore for 10 years. Because the government has stressed the importance of drawing leisure tourists, most of the gaming operators have teamed up with entertainment partners. Malaysia-based casino company Genting is bringing Universal Studios to the dance, for example.

So far, Harrah's has been mum on its entertainment plans for Sentosa. However, a big announcement of a well-known partner along the lines of Universal could give more credibility to its bid and help reignite the stock.

Speaking of Asia, Bloomberg News reported last week that Japanese officials have had talks with Harrah's executives about operating the country's first casinos, which could open in 2010. According to the story, Japan is looking to follow Singapore and China's lead and lift its ban on casinos in an effort to boost tourism. If so, Harrah's might have yet another opportunity to tap into the lucrative Asian gaming market.

Meanwhile, back at home, Harrah's continues to benefit from last year's $9.4 billion acquisition of Caesars Entertainment, a deal that nearly doubled the company's size and increased its exposure to the lucrative Atlantic City market. Importantly, it greatly expanded Harrah's presence in Las Vegas, adding Caesars Palace, Bally's, Paris and the Flamingo to its namesake property and the Rio.

The result: Las Vegas now contributes a full one-third of Harrah's revenues and nearly half of its operating income. Considering that casino gaming revenues on the Vegas Strip surged nearly 17% to $6.4 billion in the year that ended in May, according to Nevada's Gaming Control Board, added exposure to Sin City is a big plus.

Even better is the progress that Harrah's is making in integrating Caesars properties and squeezing out synergies. In its second-quarter earnings report, the company said it has already realized $118 million in synergies in the first full year since the acquisition. That figure is above previous guidance and well ahead of the schedule anticipated by many observers.

An important driver of this efficiency is the company's best-of-breed customer-loyalty program.

Total Rewards is essentially a frequent-player program, offering reward credits to customers who gamble at Harrah's casinos in places like Louisiana, Illinois and Missouri that can be redeemed for jaunts to its properties in Las Vegas. Through the Total Rewards program, Harrah's has developed what's widely acknowledged to be the pre-eminent customer database in the industry, with information on 40 million customers and their casino-gaming play that's used for marketing promotions and to generate play by the company's customers when they travel among various gaming markets. Indeed, a large chunk of Harrah's sales are generated by customers playing away from their home casino.

The Total Rewards customer loyalty program is now fully integrated with all Caesars properties, helping to boost operating results by cross-marketing more casinos to more customers.

Though it's the nation's most geographically diverse casino operator, Harrah's isn't done growing. The company is rebuilding on the Gulf Coast, on land. In the next few months, management is also likely to unveil big capital-expenditure plans for Las Vegas and Atlantic City. Some observers speculate news of a major new project near the Vegas Strip could be forthcoming.

This, too, could be cause for anxiety among investors, but Harrah's is the only company in the gaming industry with investment-grade credit, and its plans will most likely be balance-sheet friendly to ensure that it remains that way.

Bottom line: Fresh off its savvy acquisition of Caesars, Harrah's stands as the most diversified domestic gaming company, with operations in every major gaming market, and its development pipeline is packed. That fact, combined with its leading customer database, positions Harrah's perfectly to reap more than its fair share of the billions that will spent each year by gamers. (Last year, $30 billion was spent at U.S. casinos.)

With Harrah's intentions to expand its reach across the Pacific into the lucrative Asian gaming market and its development of properties in Spain and the Bahamas, there's a lot of ways for it to win. With the recent pullback in the company's shares, it might be time to make a bet on Harrah's.


--------------------------------------------------------------------------------

At the time of publication, Norton's fund was long Harrah's and Las Vegas Sands, though positions may change at any time.


Charles L. Norton, CFA, is a principal of GNI Capital, Inc., an SEC-registered investment advisor that provides investment management expertise for separately-managed equity, fixed income and ETF portfolios and a hedge fund, and is co-portfolio manager of the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). In addition, Mr. Norton authors a twice-monthly newsletter, Supernova Stocks, which focuses on investments in market-leading stocks with unique and extraordinary growth potential. Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate accounts for high net worth clients. Prior to his experience on the buy side, Mr. Norton worked in the investment banking division of Salomon Smith Barney, where he was an analyst in the health care group, reporting directly to the head of the group. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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