155 North Wacker Drive L Chicago, IL 60606 s1

March 31, 2005

Editor: Ian Madsen, MBA, CFA, Editor [email protected], Tel: 1-800-767-3771,x417 Research Digest Marla Harkness, MBA, CFA, Senior Analyst Maitreyi Sen, M.A., Res. Assoc. www.zackspro.com 155 North Wacker Drive  Chicago, IL 60606

Aztar Corporation (AZR-NYSE) $28.56

Note to Readers: This report contains substantially new material. Subsequent editions will have new or revised material highlighted.

Overview

Aztar Corporation (AZR) develops and operates casinos in major domestic gaming markets in the United States. The Company has casino hotel facilities in Atlantic City, New Jersey and Las Vegas and Laughlin, Nevada, and riverboat casinos in Caruthersville, Missouri, and Evansville, Indiana. The Tropicana Casino and Resort in Atlantic City has 1,625 hotel rooms and a 137,000-square-foot casino, while the Tropicana Casino and Resort in Las Vegas has 1,875 hotel rooms and suites and a 62,000- square-foot casino. The Ramada Express Hotel and Casino in Laughlin has 1,500 hotel rooms and a 52,000-square-foot casino. Casino Aztar Evansville contains approximately 38,360 square feet of casino, while Casino Aztar Caruthersville has a capacity of 1,200 passengers plus crew and contains approximately 20,000 square feet of casino space. The Company is based in Phoenix, Arizona, and employs 9,400 people.

Aztar reported a disappointing fourth quarter 2004. The results were negatively impacted by a month- long strike in Atlantic City, ongoing construction at its Atlantic City property, a late opening of The Quarter into the slowest months of the year for gaming, and New Year’s Eve falling in 1Q’05. Not only has the weaker quarter results affected the analysts’ view on the stock, but most of them also appear disappointed with management’s non-committal attitude on future development of its prime 34-acre land in Las Vegas. This has also led most analysts to lower their estimates and rating for AZR’s stock.

Analysts have identified the following issues as critical to an evaluation of the investment merits of AZR:

Key Positive Arguments Key Negative Arguments  Company’s Atlantic City Tropicana expansion (The  Disappointing results in 4Q’04 have made most Quarter) finally opened in late November, after analysts lower estimates for FY2005. several delays and operational charges; analysts believe these issues are now behind the company.  Management’s non-committal attitude on development of the prime Las Vegas strip has  Analysts believe AZR’s growth prospects are very diluted the future visibility on AZR’s stock. favorable after it resolves the Atlantic City issues and the Las Vegas property potential is fully  A decline in the Atlantic City market remains a realized. cause for concern to some analysts.

 Strike in AC was resolved in November as union workers tentatively accepted a new 5-year plan; this resolves an ongoing issue for AZR.

For more information about the company, visit its website at www.aztar.com.

Aztar Corporation’s fiscal year ends December 31.

For fiscal 2004, the company reported consolidated EBITDA of $165.4 million, which included $12.2 million of insurance recoveries related to business interruption and the delay in the opening of the expansion of Tropicana Atlantic City. The 2004 EBITDA excludes $6.2 million of expenses related to the construction accident, and also excludes $2.9 million of pre-opening costs.

Analysts are estimating strong top-line growth for FY2005 as the long-anticipated opening of the AC Tropicana expansion finally comes to fruition. That being said, overall sales growth in FY2005 is expected to be in the low- to mid-double digits (roughly 13% year-over-year) as Atlantic City operates in a more normal business climate. For FY2006, analysts anticipate growth in the mid-single digit (5.6% year-over-year).

Sales 2003A 2004A 2005E 2006E 3Q2004 4Q2003 4Q2004 Q/Q GR. In 4Q04 Y/Y GR. In 4Q04 PROJ. GR '03-06' Atlantic City $421 $408 $483 $511 $113 $89 $94 -17.04% 5.17% 6.72% Las Vegas $154 $164 $170 $176 $41 $37 $39 -4.38% 5.36% 4.67% Laughlin $90 $93 $95 $94 $22 $22 $23 6.42% 6.42% 1.56% Evansville $126 $131 $135 $136 $34 $32 $31 -9.44% -3.76% 2.53% Caruthersville $23 $24 $24 $25 $6 $5 $6 0.00% 11.11% 2.02% TOTAL REVENUE $813 $816 $922 $974 $216 $185 $193 -10.58% 3.99% 6.20%

Margins

During the fourth quarter, the EBITDA margin dipped to 13.3%, down 300 bps from 16.3% in the corresponding year-ago quarter. Total operating expenses were higher by 8.7% year-over- year at $182.1 million, versus $167.6 million during the same period in 2003. Operating income was significantly lower, declining to $10.6 million from $17.8 million in the earlier fiscal.

Operating margins are expected to contract in FY2005 due to higher marketing costs from promoting The Quarter in Atlantic City, as well as ramp up activities at its several properties. However, increased returns in the Midwest casinos are expected to offset the decline to a certain extent.

Margins Op'g, by unit 2003A 2004A 2005E 2006E 3Q2004 4Q2003 4Q2004 Trend Q/Q Trend Y/Y Trend '03 -06' Atlantic City 51.72% 50.01% 52.40% 52.48% 52.30% 47.98% 48.52% down up up Las Vegas 18.89% 20.09% 18.49% 18.09% 19.07% 20.13% 20.39% up up down Laughlin 11.04% 11.42% 10.26% 9.66% 10.12% 11.76% 12.04% up up down Evansville 15.47% 16.01% 14.59% 13.92% 15.73% 17.22% 15.93% up down down Caruthersville 2.84% 2.90% 2.65% 2.52% 2.78% 2.91% 3.11% up up down TOTAL: Op'g 15.37% 12.79% 15.55% 16.72% 14.25% 9.61% 4.97% down down up TOTAL: Pre-Tax 10.99% 8.83% 10.44% 12.31% 10.35% 4.91% 1.39% down down up TOTAL: Net 7.49% 3.72% 6.14% 7.25% 6.13% 6.31% 0.85% down down down

Earnings Per Share

Diluted earnings per share for fiscal 2004 (as reported by the company) were 76 cents, after an expenditure of 19 cents associated with a loss on early retirement of debt and 31 cents on an adverse

Zacks Investment Research Page 2 www.zacks.com state tax court ruling recorded in the first quarter of 2004. Fiscal 2004 diluted earnings per share include 11 cents attributable to construction accident-related insurance recoveries net of construction accident-related expenses, and also including those related to other income, and pre-opening costs. For the fourth quarter, diluted EPS was five cents, compared to 32 cents in the 2003 quarter.

The average of full year estimates for 2005 by the analysts included in our digest is a penny above the Zacks consensus number of $1.53 for the year. Individual analyst estimates exhibit a wide range of projections from a low of $1.30 (Goldman Sachs) to a high of $1.99 (CIBC). For FY2006, analysts’ EPS forecast ranges from a high of $2.32 (Jefferies) to a low of $1.12 (J.P. Morgan), with the digest average being $1.88.

EPS 2003A 2004A 2005E 2006E 3Q2004 4Q2003 4Q2004 1Q05E Q/Q GR. In 4Q04 Y/Y GR. In 4Q04 Zacks Consensus $1.47 $0.83 $1.52 $1.87 $0.42 $0.13 $0.05 $0.34 -88.10% -61.54% Zacks Digest Model Max. $1.47 $0.83 $1.99 $2.32 $0.42 $0.13 $0.05 $0.49 -88.10% -61.54% Zacks Digest Model Min. $1.47 $0.83 $1.30 $1.12 $0.42 $0.13 $0.05 $0.24 -88.10% -61.54% Zacks Digest Model Avg. $1.47 $0.83 $1.53 $1.88 $0.42 $0.13 $0.05 $0.34 -88.10% -61.54%

Target Price/Valuation

Target prices for AZR stock range from $27 (Calyon) to $34(Lehman) with an average of $30.63. The most common valuation method used by the covering analysts is a 6-8x multiple on FY2005 EV/EBITDA estimates. This represents the mid-range of the historic EV/EBITDA multiple that the company’s stock has traded in.

Rating Distribution Positive 0 Neutral 77% Negative 23% Avg. Target Price $30.63

Long-Term Growth

Long term growth rates for AZR range from 8.4% (CIBC) to 15% (Smith Barney). Most analysts view the company’s future visibility to be hazy as of now due to management’s indecision on developing its prime Las Vegas property, which had been expected to begin by 1Q’05. Several analysts had pegged this asset to be the key growth catalyst for Aztar in the next few years. The company’s long-term growth prospects, therefore, hinges on how fast it can develop its Las Vegas property. Analysts believe AZR can deliver solid double-digit bottom-line growth going forward due to the strength of its Atlantic City operation.

The primary risks to long-term growth for Aztar remain the timing of regulatory approvals, consumer acceptance of new titles, integration risk, and the potential for system integrity issues with newly developed games. The timing of regulatory approvals, popularity of new games, the integrity of a newly introduced operating system, and the timely development of its Las Vegas property will have a material impact on the prospects for long-term growth of Aztar Corporation.

Zacks Investment Research Page 3 www.zacks.com Individual Analyst Opinions

POSITIVE RATINGS

NEUTRAL RATINGS

Banc of America – The stock is rated NEUTRAL with a $28 price target. Analyst believes competitive pressures will affect Atlantic City returns going forward. Thinks investors are ignoring the fact that, although the LV property is of high value currently, it would take an enormous budget to develop it for future gains.

CIBC – The stock is rated a SECTOR PERFORMER with a $32 price target. Downgraded the stock from Sector Outperformer. Though the analyst is optimistic about The Quarter and expansion in Atlantic City, prefers to remain cautious due to management’s noncommittal attitude in Las Vegas. Thinks the future is a difficult thing to assess at this juncture.

Calyon – The stock is rated NEUTRAL with a $27 price target. The analyst prefers to remain cautious on the stock owing to earnings shortfall in 4Q’04 and the management’s decision to yet again to postpone development of the Tropicana-Las Vegas strip.

Deutsche Bank – The stock is rated HOLD with a $30 price target. Downgraded the stock from Buy owing to slower ramp up at Tropicana and postponement of development at the Las Vegas strip.

Jefferies – The stock is rated a HOLD with a $31 price target. The analyst maintains a cautious Neutral outlook on the stock.

Lehman – The stock is rated EQUAL WEIGHT with a $34 price target. The analyst ascribes a 7.25 multiple to both Tropicana Atlantic City and Tropicana Las Vegas given its development potential.

Merrill Lynch – The stock is rated NEUTRAL with no given price target. The analyst is disappointed with the company’s decision to postpone the development of its Las Vegas strip. Also, in light of the uncertainty of its core earnings in Atlantic City, the analyst prefers to maintain Neutral outlook on the stock.

Morgan Stanley – The stock is rated EQUAL WEIGHT with a $30 price target. The analyst believes that Aztar’s not accepting even near-term dilution may limit opportunities. Thinks with a Las Vegas redevelopment decision again delayed, potential growth or clarity on direction is low for now.

Smith Barney – The stock is rated HOLD with a $33 price target.

Wells Fargo – The stock is rated HOLD with no given price target.

NEGATIVE RATINGS

Bear Stearns – The stock is rated UNDERPERFORM with no given price target. The analyst downgraded the stock from positive. Believes that there is value in its Las Vegas real estate, but thinks

Zacks Investment Research Page 4 www.zacks.com that, despite the positives, AZR’s shares will underperform compared to a peer group that has relatively strong fundamentals. Thinks the shares, currently trading at ~$33, are a poor risk reward.

Goldman Sachs – The stock is rated an UNDERPERFORM with no given price target. The analyst believes it will take AZR longer to get meaningful incremental EBITDA from the Quarter in the near- term, especially during the seasonally slower winter months. In addition, AZR management has also decided to postpone its decision on what it plans to do with its 34 acres of land in LV, which further clouds the visibility of AZR’s organic growth prospects.

J.P. Morgan – The stock is rated UNDERWEIGHT with no given price target. The analyst reiterates Underweight rating in anticipation of disappointing ROIC on The Quarter in Atlantic City and feels it could be a drag on EPS.

Zacks Investment Research Page 5 www.zacks.com