Monday, August 9, 1999

Argosy Gaming Co.
Phone: 618-474-750
Website: www.argosycasinos.com
Price (8/6/99): $13 11/16


All aboard! That's what many Argosy bulls have been yelling for many moons as the newer riverboat casinos started pulling the company up the river to profitability. Argosy's massive casino in Lawrenceburg, Indiana opened in late 1996. But the property wasn't finally completed to the point where the cash flow came flooding in until just the last few quarters.

After operating for several years where essentially all the funds generated by the company's casinos went to pay interest on the debt used to build the units, Argosy has finally gathered enough steam to break free of the interest payments holding the company back from profitability. While the interest payments are still there, they are now eclipsed by the cash flow created at Argosy's riverboats.

The result of this increased profitability is a stock that has been blessed with an impressive reversal of fortune. Argosy had been sinking ever since Wall Street's 1995 mania over riverboat gaming started to cool. Following a grueling series of years that saw the stock lose roughly 90% of its value, Argosy bottomed below $2 a share this past October. Recently, the stock has raced back up into the double digits, making just about anyone who bought and held the stock over the past three years feel like they have finally hit the jackpot.


Argosy Gaming operates five riverboat casinos in the middle of the country. The company operates casino complexes in the greater St. Louis, Kansas City, Baton Rouge, Sioux City, and Cincinnati areas.

Argosy's Lawrenceburg boat (serving the Cincinnati market) is the largest revenue producing riverboat in the domestic gaming industry. The company owns a 57.5% stake in the Lawrenceburg unit, while local investors, including Indiana-based insurance firm Conseco (NYSE: CNC), own the balance of the equity in the successful boat. The behemoth floating casino boasts 74,300 square feet of casino space, roughly 2000 slot machines and over 100 table games. The Lawrenceburg casino is twice the size of Argosy's next largest boat, owns more than 60% of the Cincinnati gaming market, and should produce more than $300 million in net revenue this year.

Argosy Gaming is headquartered in Alton, Illinois, and was the first company to enter each of its current markets. Unlike years past, Argosy does not have any plans to open new casino complexes. Rather, the company is now focusing on developing and maximizing the profitability of its existing units.


Income Statement*
12-month net sales: $548.5 million
12-month income: $18.6 million
12-month EPS: $0.70
Profit Margin: 3.4%
Market Cap: $388.2 million
(*Excludes one-time debt restructuring charge)

Balance Sheet (as of Mar. 31, 1999)
Cash: $105.9 million
Current Assets: $115.1 million
Current Liabilities: $80.2 million
Long-term Debt: $409.9 million

Price-to-earnings: 19.6
Price-to-sales: 0.7


While profitability eluded Argosy for many years as it borrowed extensively to build its portfolio of riverboat complexes, the earnings picture began to change last year. The company actually started posting positive earnings in the second quarter of 1998, and it was a fairly safe bet that the profits were here to stay since Lawrenceburg was essentially finished and there was little else changing the status quo at its other units.

Looking at the company's balance sheet over time would have also given some clues that Argosy was finally headed in the right direction. Between June of 1998 and March of this year, the company's cash horde grew from $65.3 to $105.9 million, while the long-term debt was pared from $423.8 to $407.8 million. This financial improvement was fairly consistent over time and was evident long before the stock really started to skyrocket.

Another way to have perhaps found Argosy was to compare the company's operating cash flow (otherwise known as EBITDA) to its Enterprise Value. This is an extremely common valuation metric in the gaming industry that takes the firm's cash flow into consideration in light of the total capitalization, including debt. Most gaming companies trade anywhere from 7 to 10x this multiple, yet Argosy traded close to 5x trailing (and stable) EBITDA at its October low.

A final signal that Argosy might be headed higher was insider buying at the company. Two different insiders bought the company's stock below $5 a share with their personal funds this past winter. As the old saying goes, insiders buy for only one reason.


Where the gaming industry as a whole has been rapidly consolidating, with companies merging left and right, Argosy is one of the few companies that has stayed the course and has not bought any other casinos or approved any buyout offers. The gaming industry consolidation doesn't look to end any time soon, and it wouldn't be surprising to see Argosy as either a purchaser or a takeover target.

One positive thing Argosy has done recently is restructure its debt. While the company took a $34.8 million charge this past quarter to refinance its outstanding bonds, it has managed to shave roughly 2.5% off its cost of debt capital. This should amount to about $12 million in saved finance charges annually, which will, all else being equal, translate into higher net margins in the coming years.

Looking at the company from an EBITDA valuation standpoint, Argosy is on track to record total EBITDA for the year in the $90 to $100 million range. It's important to remember that some of the cash flow from Lawrenceburg needs to be backed out of the company's consolidated EBITDA, since Argosy only owns 57.5% of the unit. Assume 1999 adjusted EBITDA of $95 million and compare that to a recent Enterprise Value of around $775 million, and Argosy is trading at slightly higher than 8x EBITDA, which puts it smack dab in the middle of where its gaming industry peers trade.

From an earnings standpoint, Argosy is expected to earn $0.92 per share this year and another $1.31 per share in the year 2000 as the positive effects from its financial restructuring start to really hit the bottom line. This puts that stock at roughly 10x those forward earnings estimates, far below what the general market is currently trading at. Unless something drastic happens (such as widespread gaming regulation or increased casino taxes), it looks as if these numbers are fairly "safe."

There may be slightly more upside to the stock from here, but the easy money has already been made. Either way, Argosy looks like it has turned the corner.

--Paul Larson

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