Sunday, July 30, 2006

Harrah's Entertainment has realized that building a worldwide casino
operation is going to play havoc on earnings. The gaming industry's largest
casino operator said Thursday its second-quarter earnings were affected by
development costs and other factors related to growing a company with both
domestic and international interests. Revenue for Harrah's rose 67 percent
in the quarter that ended June 30 to $2.47 billion, compared with $1.42
billion a year ago. In the 2005 second quarter, revenue was collected for
just 17 days from the casinos Harrah's acquired when it spent $9 billion for
Caesars Entertainment. Harrah's said its net income in the quarter was $129
million, or 69 cents a share, up 22 percent from $106 million, or 65 cents a
share, in the same period a year ago. When earnings per share were adjusted
to account for various costs, the company earned 95 cents a share, up from
86 cents a share a year ago. Analysts polled by Thomson First Call thought
Harrah's would earn $1.02 per share in the quarter. Harrah's Chief Financial
Officer Charles Atwood said the company bought back and refinanced $750
million in debt during the quarter, which affected its income statement.
Harrah's had $18 million in development and master planning expenses in the
quarter. A year ago, that figure was $7 million.
The lower per-share earnings were also affected by an increase in the number
of shares outstanding resulting from stock issued for the Caesars
acquisition.

Shares of Harrah's closed at $60.36, down $3.49 or 5.47 percent, on the New
York Stock Exchange. On May 10, Harrah's shares were $83.33.

"We believe the sell-off in Harrah's is a knee-jerk reaction to an earnings
per share miss," Stifel, Nicolaus Capital Markets gaming analyst Steven
Wieczynski said in a note to investors. "On a relative basis, we believe
Harrah's shares are now undervalued and we would accumulate shares at this
level, all else being equal."

Harrah's report, which followed earnings announced this week by Station
Casinos and Boyd Gaming Corp., caused Goldman Sachs gaming analyst Steven
Kent to issue a cautious note about the gaming industry.

"As the third major operator to disappoint this quarter, it is looking
increasingly likely that it may be a difficult quarter across the board for
major U.S. gaming operators," Kent wrote in a note to investors.

Harrah's Chairman Gary Loveman, however, said the company's 11 casinos in
Las Vegas and Atlantic City had a robust quarter.

In Las Vegas, Harrah's casinos, including the five casinos acquired in the
past year, had revenue of $803.3 million, a 154.1 percent increase from
$316.1 million a year ago. Revenue in the quarter from Harrah's Atlantic
City casinos, two of which were acquired from Caesars, was $521 million, up
101.2 percent from $259 million a year ago.

In a conference call with analysts, Harrah's executives said the recent
72-hour closure of Atlantic City's casinos by the state over budgetary
matters will cost the company between 4 cents and 6 cents per share when
third-quarter revenue is announced.

"Our healthy, broad-based growth in the second quarter demonstrates that our
overall operations remain strong," Loveman said.

Loveman said integrating the Caesars' properties into Harrah's corporate
structure brought $118 million in cost savings over the first year of
ownership. The company had originally predicted it would realize $80 million
in saving after buying Caesars.

Loveman cautioned investors that master-planning for future Harrah's growth
will have some implications.

"During the quarter we incurred higher project development and master
planning costs," Loveman said. Harrah's is working on development
opportunities domestically in Rhode Island and overseas in the Bahamas,
Spain and Slovenia.

Harrah's has three days to decide if it will bid on a second gaming site in
Singapore. The company lost a bid for the city-state's first casino site in
the downtown Marina Bay district but is still exploring its options for
Sentosa Island with its Singapore-based partner, Keppel Land.

"We're still evaluating our position there and we have a few more days to
decide," Atwood said. "We figure we'll use all those days to make a
decision."

Atwood said Harrah's would still like to expand to Macau, the Chinese gaming
enclave where Las Vegas Sands, Wynn Resorts and MGM Mirage are building
large hotel-casinos.

The company's main development focus domestically, Atwood said, will be
master-planning its real estate holdings in Las Vegas, Atlantic City and
Biloxi, Miss.

In Las Vegas, Harrah's has 130 acres of land on the east side of the Strip,
which includes the Imperial Palace, Flamingo, Harrah's Las Vegas, Bally's,
Paris Las Vegas and several nongaming parcels. Atwood said the company is
working on a master plan for the land that would involve an overall strategy
where customers could easily visit all of Harrah's casinos.

"We want to remove all the physical barriers," Atwood said. "We look at Las
Vegas from an overall picture, that we offer people a comprehensive
experience at many of our properties."

This week's announcement by Boyd Gaming that Coast Casinos founder Michael
Gaughan would be leaving the company and acquiring the South Coast fueled
some speculation that Harrah's would try to purchase the Barbary Coast, a
former Coast Casinos property now owned by Boyd Gaming.

The small Barbary Coast sits at the corner of Flamingo Road and the Strip,
in the heart of Harrah's casino empire.

"We aren't shy about our desire for the Barbary," Atwood said.