Trump Entertainment: How Much Does PA Matter?

Dec.19.06 | About: Trump Entertainment (TRMP)

We have been long Trump Entertainment (TRMP) for a while, predating the recent private equity deal craze in gaming, and very little of our thesis has had anything to do with Trump winning a Pennsylvania license [decision should be reached this Wednesday, Dec 20th].

If you want to consider this a poker hand, we feel that there are several outs for TRMP to be a winning hand [i.e. there are multiple outlets to create value]. We believe that there are also several fundamental and momentum driven reasons, including:

1) A top turnaround management team led by Jim Perry. He appears focused on not only cutting costs but growing top line. We feel Trump's $10 mil top line beat last quarter is a testament to that.

2) The Trump brand. While investors may not want Mr. Trump running the company day to day [less than 2 years out of bankruptcy], it is hard to deny that he is a marketing machine greatly augmented by NBC's The Apprentice returning to Sunday nights in several weeks. The Apprentice provides weekly exposure for the brand, and, we feel it is positive for the stock.

3) This is one of Jim Cramer's top gaming picks. We would continue to expect him to support the shares on Mad Money and other venues.

4) The Taj overhall. We feel the new bar on the gaming floor is attracting the youth crowd again-- making Trump Taj a more happening place. 2007 should bring a revamped lobby and hallways, and 2008 the new Taj Tower.

5) The new "Pier at Caesar's", which has replaced the Old Ocean One Mall, is right across the Boardwalk from Trump Plaza. We would think that, over time, walk through traffic should improve from this. High-end retailers and fancy upscale restaurants now sit where lower end discount stores used to reside.

6) We believe that there is potential for margin improvement. If Perry is successful in lowering the percentage of comped hotel rooms, that alone could help lift operating margins in addition to adding higher margin amenities and diligent cost cutting.

7) Valuation. At a little above $22, TRMP trades at approximately 9x 2008 EBITDA which is roughly a 10% premium to peers. That being said, it trades at a discount to the gaming company's in play and it is a top brand.

8) Improving Infrastructure. We feel the boardwalk is becoming more Vegas-like with new amenities and that over time it will draw younger players and higher-end players [whales]. Pinnacle (NYSE:PNK) has purchased the Sands and plans to tear it down and erect a new higher end casino. There will also be a direct rail from NYC sometime in the middle of 2007. The point being, AC appears to be improving the entire experience. We don't believe MGM Entertainment (NYSE:MGM)/Boyd Gaming's (NYSE:BYD) Borgata [off the boardwalk] will be the only high end place to play.

9) We believe that the scarcity of available AC development land will drive value over time leading to takeover/asset divestiture potential. The rumor of a Wynn Resorts (NASDAQ:WYNN) deal sent the shares to $24 or so. While we don't necessarily think a WYNN deal is imminent, a Penn National Gaming (NASDAQ:PENN) deal is feasible. Penn National has certainly demonstrated its acquisitive nature and ability to fund a deal in the recent Harrah's (HET) negotiations.

10) New Sell Side initiations. As HET and Station Casino (NYSE:STN) are privatized, we feel that Wall Street will be looking for additional names to cover. TRMP has only 7 analysts and only one is a bulge bank [Deutsche (DBK)]-- that leaves virtually all of Wall Street to initiate.


1) $1.4 billion debt level. Should the consumer materially begin to weaken [the fears several months ago], this would be a concern. Otherwise, we are comfortable that Perry should be able to deliver and delever TRMP.

2) Competition from PA. If TRMP doesn't win a concession in PA, we feel it will most likely lose some slot business over time. But, to put that in perspective, we feel table games are a better growth area [it's slots only in PA] and if one assumes that about 1/3 of AC business is PA oriented, and that the AC casinos will lose 1/3 of that, we think we're only taking about 10% potential slot attrition for TRMP. One needs to remember that AC is becoming the full resort experience, and it's different than what PA will offer.

3) The much talked about and dreaded promo wars. We believe that although this should certainly be monitored, it isn't really that much of an issue. TRMP has a very strict budget in its turnaround plan.

In conclusion, while a win for TRMP would be great, and certainly a company making level type of catalyst, we hardly feel that it's a company breaking catalyst if they don't win a concession.

Disclosure: Author is long TRMP.

TRMP 1-yr chart