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Harrah's Surprise Value


It's hard to argue this is anything but good news for the bulls.


The Harrah's (HET) news surprised me this morning. It's a group my firm is involved with and one of the safest bets on the consumer in this country in my view. The surprise was that I would not have expected private equity investors to target the biggest company in any industry without any visible scars. In other words, it strikes me as paying at least fair market value.

Investors hire groups like this for some of the sharpest knives on the Street to slice open hidden value by taking a company private, and paying dearly for those knives. I'm not sure how much was hiding in HET at more than $66 on Friday where it last traded and that's from a bull on the name. At that price the stock traded at:

  • 2 x Book
  • 10 x Cash Flow
  • 1.35 x Sales

Those values on a stock whose ROE was 11.5 (down considerably from recent years), and those were at $66 a share on Friday, not the $81 possible price tag announced today.

I did a quick peek inside my trusty Thomson treasure chest to see how many other stocks traded below each of those valuations (not just one) along with a higher ROE, all of the pre-announcement levels. There were almost 400 stocks excluding illiquid micro issues. If the smart money is to be trusted, each of these just got more appealing.

On the one hand I think it's hard to argue this is anything but good news for the bulls that there is this kind of interest outside the publicly traded markets willing to pay these prices, and there is more to come. Before leaving Wall Street last year, the last wave of fresh capital I saw from high net worth investors was being directed to private equity funds as an (hoped for) answer to flat markets. Too much in my view. Funds of funds with fees and fees. But, I'm not sure this is what they had in mind.

My reservation at Green Valley Ranch in October couldn't be bought out at any price. The Stations Casino property is one of my favorite due diligence trips of the year.

P.S. Speaking of great trips. Minyans in the Mountains 3 favorite Tom DeMark gave a buy signal on HET a few weeks before Vail, more than 10 points ago

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No positions in stocks mentioned.
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