Those Pennies Add Up

Riverboat casino operator Ameristar Casinos (Nasdaq: ASCA  ) reported solid earnings growth this morning, but let's save that discussion for later.

First, consider that Ameristar's share of the market is now tops in each of its four riverboat markets. And the competition is fierce, including Harrah's Entertainment (NYSE: HET  ) , Isle of Capri (Nasdaq: ISLE  ) , and Argosy Gaming (NYSE: AGY  ) . You may be surprised how it got there.

Welcome to Penny Planet!
As part of its "Every Day Promotion" for the month of April, Ameristar has been giving away free T-shirts every Tuesday at each of its riverboat properties. One had the words "Winning Is Fun!" emblazoned across the front, another a caricature of slot machines with the "Fabulous Las Vegas Bonus" sign.

Yesterday's shirt: "Welcome to Penny Planet!"

We should note for first-time readers that the bulk of Ameristar's revenues come from its Missouri properties in the St. Louis and Kansas City markets. A quick visit to the financial page of the Missouri Gaming Commission website is particularly revealing: Backing out revenues from penny denomination slots, total slot revenues at market leader Ameristar St. Charles and No. 2 Harrah's Maryland Heights in St. Louis are roughly equal. The same applies for No. 1 Ameristar and No. 2 Harrah's properties in Kansas City.

Here's the catch: Ameristar's 781 penny slots are nearly three times Harrah's total in the St. Louis market and its 743 in the Kansas City market represent almost four times as many as Harrah's! That's no accident. As you can see, about a quarter of Ameristar's slots are penny denomination compared to just roughly 10% of Harrah's. Further, if you include two-cent and nickel denominations, nearly half of Ameristar's slots are counted, compared to roughly 30% for Harrah's.

Slot Composition: Penny Slots

Casino 1-Cent Total % Total
Ameristar (STL) 781 3,294 23.7%
Harrah's (STL) 267 2,617 10.2%
Ameristar (KC) 743 2,937 25.3%
Harrah's (NKC) 191 1,964 9.7%
Argosy Riverside 173 1,750 9.9%
Source: Missouri Gaming Commission

Coinless video gaming, baby!
It's pretty clear that Ameristar is making a concerted effort to dominate the fast-growing demand for penny- and nickel-denomination slot play. Management has said as much in print.

Moreover, we're not talking about traditional reels. Though not quite as sophisticated as a Microsoft (Nasdaq: MSFT  ) Xbox game from Electronic Arts (Nasdaq: ERTS  ) , these are the new video slots with amusing themes from the likes of International Game Technology (NYSE: IGT  ) and WMS Industries (NYSE: WMS  ) .

What makes this possible and exceptionally profitable is coinless slot technology -- Ticket In/Ticket Out (TITO) -- the benefits of which we discussed in October. Basically, this makes it easier for guests to cash in and out, switch machines, and play without getting their hands dirty -- and all of this while requiring less labor for the casino.

Where 55% of Argosy's slots are now TITO-capable and 60% of Harrah's planned transition was complete at the end of March, Ameristar was 75% coinless by the end of 2003. Clearly, Ameristar has benefited from being an early adopter.

Solid earnings growth
Again, Ameristar continued to gain market share into the first quarter of 2004. In fact, total market share was up sequentially at all riverboat properties except Ameristar Kansas City, where Argosy's new and expanded barge cut into market share by 1.7 percentage points. The one figure that stands out is Vicksburg, where Ameristar took 45.9% market share in a four-boat market almost by virtue of its location alone.

Overall, first-quarter net revenues climbed 13.7% to a record $214.4 million, helping drive EBITDA (earnings before interest, taxes, depreciation, and amortization) up 18.8% to $59.5 million. Meanwhile, net income jumped 35.7% to $15.9 million, or $0.58 per share -- ahead of its revised $0.55 to $0.57 EPS forecast and beating analyst estimates by a couple of pennies (fittingly).

As a result, Ameristar now expects 2004 EBITDA of $222 to $230 million, rather than $215 to $225 million. In addition, the company raised its 2004 earnings forecast to between $2.03 and $2.21 per share from between $1.94 and $2.16. And don't overlook the company's healthy EBITDA margins, which improved in each riverboat property except Ameristar Kansas City, which remains the laggard.

A solid value
Currently, Ameristar boasts an enterprise value of about $1.5 billion. At about 6.75 times the low end of the company's 2004 EBITDA estimate, Ameristar continues to trade at a discount to recent acquisition deals in the industry as well as to its peers. Likely, this is due to the fact that revenues are concentrated in one state (Missouri). Partially mitigating that risk is a new dividend -- if you're into that sort of thing.

Bottom line: I believe that a quality brand, healthy margins, and market leadership make Ameristar Casinos a solid buy at today's prices.

As for dividends, Mathew Emmert is definitely into that sort of thing. Take a free trial of hisMotley Fool Income Investor.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos and Electronic Arts. The Motley Fool is investors writing for investors.


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