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Dan Caputo

Station Casinos (NYSE:STN) is a gaming and entertainment company that owns nine major hotel/casinos. STN’s properties are in local, suburban markets, rather than on the famous tourist strip in Las Vegas. STN centers its business on local, repeat customers rather than the tourists drawn to the flashy hotel properties on the strip.

STN also earns revenues by managing casinos for Native American tribes. When tribes build new casinos, they often contract management out to an experienced operator like STN in order to lay the foundations of the business. STN's contracts are lucrative, but they are not often renewed, and so the firm must continually obtain new contracts with other Native American Tribes to manage more casinos. With the exception of its Native American casino management, STN is geographically confined to suburban Las Vegas, and it has no plans to otherwise diversify nationally.

Business Financials

Station Casinos owns and operates nine major hotel casinos, all located off the Vegas Strip. They are Palace Station, Boulder Station, Texas Station, Sunset Station, Santa Fe Station, Red Rock (which opened in April 2006), Green Valley Ranch, Fiesta Rancho, and Fiesta Henderson. They also own and operate eight other smaller properties in Vegas and California. STN manages Thunder Valley in California for a Native American Tribe.

On November 7, 2007, Station Casinos completed its merger with FCP Holdings and Fertitta Partners LLC. As a result of the merger, 24.1% of its shares of common stock are owned by Fertitta Partners LLC, and the remaining 75.9% of its shares of common stock are owned by FCP Holding, Inc. The shares of Station Casinos were sold for $90.^[1]

As seen in the graph below, revenues grew about 8% between 2006 and 2007, however they realized a net loss of $376 million in 2007. This is due to merger costs of approximately $497 million with Fertitta Partners LLC and FCP Holdings, completed on November 7, 2007.^[2]

66% of their revenues come from their casino business, which is centered around slot and video poker machine play.^[3] Because STN's business is driven by slots and video poker, they are more stable than other casino operators that rely on riskier table play and hotel revenues. Roughly 90% of their casino profits come from slots and video poker. 16% of their revenues come from management fees for managing Thunder Valley.^[4] Thunder Valley is owned by a Native American tribe. Their revenue streams are broken down in the pie chart below.

Key Trends and Forces

The Growth Rate of Las Vegas’ Local Market has Increased STN’s Revenues

Station Casinos owns no properties on the tourist-heavy Las Vegas Strip. They instead focus on the local market, which is quickly growing as Las Vegas' suburbs become more populous. The local Vegas market is valued at $2.4 billion, and has grown around 10% annually in the last decade. STN owns a total of 17 casino properties in the Las Vegas suburbs. People who live in the Las Vegas suburbs gravitate towards Station's properties because there are not many tourists. Station also attracts repeat customers by combining restaurants and casinos in a one-stop shop for evening entertainment. Station Casinos' profitability therefore is not driven by Vegas tourism, but instead by the local repeat customers.

Off-Strip Land Restrictions Protects Station's Competitive Advantage

In 1997, the Senate passed a bill that limited off-strip land approved for casinos. Station Casinos currently owns most of the approved properties for casinos in this zone. This is a considerable barrier to entry for competitors, because they cannot legally operate casinos in the restricted zone. This law is subject to change, which could approve more properties for casinos, which would negatively affect STN's profits. Without a change in legislation, however, Station has a considerable competitive advantage in this market as it controls both existing properties and future development.

Station's Lack of National Diversification Makes it Susceptible to the Las Vegas Economy

Station Casinos operates most of its business in Nevada, aside from the casino it manages for the Native American tribe in California. Station did own a casino in Missouri, but was recently forced to sell it and settle a lawsuit for $38 million after allegations that it obtained its license improperly. Because Station Casinos is so heavily concentrated geographically, its profitability is closely linked to the local Las Vegas economy. Tourism-based casinos on the strip rely more on the general economy of the U.S. But Las Vegas' economy specifically affects Station's profits. The entertainment and gaming industry is reliant on excess disposable income, which shrinks during recession and grows during booming times. The past ten years have seen high growth rates in Las Vegas and its suburbs, but the recent subprime mortgage crisis and credit crunch may slow the growth rate significantly

Native American Gaming Contracts Are Profitable for Station, but Expire in Two Years

Station Casinos manages, but does not own, Thunder Valley casino in California. The casino is owned by a Native American tribe, and Station Casinos takes about 20% of the profits. That revenue is approximately 16% of Station's total revenues. Costs associated with managing this casino are relatively low. Employee compensation and maintenance are the biggest costs, but Station does not have to pay rent or deal with legal issues because they do not own the property. Their contract to manage Thunder Valley was approved by the National Indian Gaming Commission (NIGC) in 2003, and expires in 2010. After the contract expires, it is not likely to be renewed - common practice is for the tribe to assume management responsibilities once the contract runs out. Station Casinos has instead tried to acquire new contracts with other Native American tribes that are buying land near Las Vegas.^[5]

Competition

• Boyd Gaming (BYD)
• Harrah's Entertainment (HET)
• Mandalay Resort Group
• MGM MIRAGE (MGM)
• Caesar's Entertainment, Inc.

Station Casinos differentiates itself from competitors in two main ways: management of Native American casinos, and its dominance of the local market. Unlike MGM Mirage and Harrah's Entertainment, Station Casinos owns no property on the Las Vegas strip. Those firms rely heavily on tourist traffic. Station Casino owns nine properties that are not on the strip, aimed toward the local repeat customer. They are Palace Station, Boulder Station, Texas Station, Sunset Station, Santa Fe Station, Red Rock (which opened in April 2006), Green Valley Ranch, Fiesta Rancho, and Fiesta Henderson.^[6] They also own and manage eight other smaller casino properties. Station Casinos also manages Thunder Valley casino near Sacramento, California. Station Casinos has a seven year contract approved by the National Indian Gaming Commission (NIGC) to manage Thunder Valley, which expires in 2010.^[7] Station Casinos sees development and acquisition opportunity to manage other Native American casinos, by acquiring contracts to work with Native American tribes such as The Federated Indians of Graton Rancheria, Gun Lake Tribe, Mechoopda Indian Tribe, and North Fork Rancheria of Mono Indian Tribe.^[8]

References

1. ↑ STN 10-k report 2007, page 1
2. ↑ STN 10-k report 2007, page 60
3. ↑ STN 10-k report 2007, page 3
4. ↑ STN 10-k report 2007, page 60
5. ↑ STN 10-k report 2007, page 8
6. ↑ STN 10-k report 2007, pages 4-8
7. ↑ STN 10-k report 2007, page 8
8. ↑ STN 10-k report 2007, pages 9-12