Description

Sands Regent (SNDS) has turned itself around, but its stock is still being valued as though it were struggling. On 11/4, it reported diluted earnings of $.26 per share for the September 2002 quarter (the first quarter of its fiscal 2003) versus $.10 for the September 2001 quarter.

The company owns and operates the Sands Regency hotel/casino property in downtown Reno, as well as the Gold Ranch Casino and RV Resort at the Nevada/California border, not far from Reno. The quarter ending in September was the first to show the full impact of the Gold Ranch acquisition.

One way to value SNDS is to consider the stock’s price a year ago and judge the appropriateness of its interim move. Certainly, the roughly $2.50 price of November 2001 reflected the heightened pessimism and uncertainty that prevailed in the casino/gaming industry immediately after 9/11. In addition, the company had just reported $.10/share earnings.

During the past year, this pessimism and uncertainty has diminished. Occupancy is up to 92.5% from 89.3% at the Sands downtown Reno property, with the average room rate up 5% to $41. In addition, Gold Ranch is achieving on-target performance and has become a major contributor to profits. SNDS revenues for the past quarter were up 76% on a year-over-year basis, with EPS up 160%. And the CEO is saying that this quarter was no oddball fluke. Based on this, I would have expected the stock to be up quite a bit more than 32%.

Though the company does not give explicit earnings guidance or projections, the CEO says that this past quarter is indicative of the future. He adds that the conditions in fiscal 2003 are more comparable to fiscal 2001 (when the company earned $.10/share during the October-June period) than to fiscal 2002. (Note that SNDS is highly seasonal and tends to make most of its money during the summer.)

By common measures of value, SNDS is cheap.

Were the company to match the fiscal 2001 performance for the remainder of 2003, it would earn $.36/share. A stock price of $3.29 is only 9.1x this earnings projection, in contrast to the casino/gaming industry average P/E of 21.25x (per Multex). Even a break-even performance for the remainder of 2003 would give SNDS an EPS of $.26 and a P/E of only 12.7x.

Whereas the industry’s Price/Sales ratio is 1.99, SNDS’s stands at less than .50.

Shareholders’ equity is at $34.9 MM (according to the company’s recent conference call), which works out to $6.78 per share (based on 5,148,355 shares -- diluted, to be ultra-conservative). Thus, the stock is trading at less than half its book value (the industry average being 3.56x).

Good things are happening. Reno’s largest convention facility was closed much of this past year for renovations, but it is now open for business again. The Women’s International Bowling Congress is on Reno's calendar for February (“a big plus,” per SNDS’s CEO). And just three blocks from the SNDS downtown Reno property, a bowling center/convention facility is scheduled for opening in two years.

The company has apparently just scratched the surface of Gold Ranch’s potential. According to Monday’s press release, “Gold Ranch occupancy at the newly opened RV park continued to strengthen and our cross-promotion strategy between the two properties is beginning to show positive results." In the short run, SNDS plans to grow Gold Ranch through new marketing concepts, studying the property for a year before making capital expenditures on such items as food courts and additional slot machines.

A significant percentage of revenues comes from the local population. The downtown SNDS property stands to benefit from Reno’s rapid growth, while the growth of Verdi and Truckee are positives for Gold Ranch.

Given the strong recent operating performance of SNDS, as well as its prospects for future earnings growth, I do not believe that the stock’s current discounts to industry multiples are appropriate. (How much of a discount does SNDS's illiquidity deserve? Probably not 50-75%.)

Potential negatives:
1) Future capital expenditures are likely to drain cash flow. These would include enhancements to Gold Ranch (in about a year), as well as $4MM in improvements to the downtown Sands (in two years).
2) Dependence upon California economy, visitors from California being a major revenue source.
3) Industry-wide risks, such as terrorism and oil price increases.
4) Over 40% of the company is owned by the Cladianos family, which has not been amenable to buyout offers in the past.

(Disclosure note: I own some SNDS, as you may have guessed.)

Catalyst

Potential catalysts:
1) Continuing strong operating performance.
2) Continuing growth of Reno, Verdi, and Truckee.
3) Cyclical improvement in overall economic conditions, particularly in California.
4) Easing of tensions in the Middle East. (Or at least more clarity with respect to where the Iraq situation is headed.)
5) Cladianos family cooperation with a future suitor.
6) Future accretive acquisitions.