Ameristar: Time to Buy?

In part one, we discussed how the recent hit riverboat casino operator Ameristar Casinos (Nasdaq: ASCA  ) took has put the stock into value territory. The stock was already cheap for a cheap company, much less a company that holds the leading market share in every market in which it competes.

In addition, we noted how some of the big industry merger agreements in recent days -- most notably the one between Harrah's Entertainment (NYSE: HET  ) and Caesars Entertainment (NYSE: CZR  ) -- have opened up acquisition opportunities for Ameristar to penetrate new markets, diversify its revenue streams, and further develop its brand. As we said before, the merger will most likely result in either Harrah's or Caesars selling off several properties in key markets.

We've already discussed one of those attractive targets in Caesars' Sheraton Tunica in the $1 billion Tunica, Miss., market. In part two, we'll explore some of the other likely acquisition opportunities. We'll also discuss one of the major issues surrounding the stock -- the subject of increasing competition in key markets.

Harrah's East Chicago
The acquisition of Caesars would give Harrah's Entertainment three properties in Indiana, which currently isn't allowed. That means one of those casinos may have to be sold.

The property being acquired is Caesars Indiana, a riverboat in southern Indiana just outside of Louisville, Ky. According to Casino Player magazine, Caesars' "Glory of Rome" is said to be the largest gaming riverboat in the world, with 93,000 square feet of gaming space. It is also a virtual monopoly carrying the highly recognizable Caesars brand, so I can't see it being sold.

That leaves the just-acquired Horseshoe Hammond (see Harrah's Gains, Gamers Lose) and Harrah's East Chicago in the Chicagoland market.

This is interesting, because if there's any way Harrah's can avoid selling either of them, it would. The company just bought the Horseshoe Hammond, picking up its brand and the high limit players. While the boat itself is a little cramped and smoky, the rest of the property is attractive, and the boat has the biggest high limit slot room and high limit table games room I've ever seen on a riverboat.

The property is also in the best location, just off the highway and 15 minutes from downtown Chicago. If Indiana were to ever allow barge-based gaming -- as opposed to the large yachts that pose as riverboats -- then Horseshoe Hammond would be something really special.

Harrah's East Chicago, in contrast, is one of the more spacious of the pure riverboats I've seen. It also has a high-quality hotel (the Horseshoe property doesn't have a hotel), as well as breathable air in the casino. I know this because I stayed there last week with a couple of friends when Hot Import Nights came to town.

And while the Horseshoe is closer to Illinois, I don't really believe that Harrah's East Chicago is really in much worse a location. I'm pretty sure Ameristar would jump on such an opportunity to get a good location in a key market -- all it really needs is to give gamers a real reason to stop at its property rather than somewhere else.

Obviously, it has done that before (point to No. 1 market share).

As I said before, if Harrah's could avoid having to sell either of them, it would. But if it must, I'd have to think it'd sell Harrah's East Chicago first. After all, Harrah's just bought the Horseshoe, and there is another Harrah's in the general market (though a good distance away) in Joliet. However, as opposed to Tunica, this area is a wide and spread-out locals market, so the dynamic is a little different. In this case, there would be little benefit for Harrah's to sell to Ameristar as opposed to a weaker competitor.

Having said that, Harrah's might be more likely to sell to private investors, rather than Ameristar or another rival. But if the deal was right, I believe it could be done.

Pennsylvania
The bill legalizing the introduction of up to 61,000 slot machines in Pennsylvania (see The Magnitude of Pennsylvania's Slots) also opens up doors for Ameristar, in addition to slot makers International Game Technology (NYSE: IGT  ) , WMS Industries (NYSE: WMS  ) , and Alliance Gaming (NYSE: AGI  ) . Ameristar has long had an interest in gaming in the state, with an eye on one of the seven racetracks that will receive authorization to implement those slots.

Helping its cause, the rule in Pennsylvania is one property per company. With Harrah's acquisition of Caesars, that effectively eliminates one competitor from the process, improving Ameristar's chances for a score.

Atlantic City
Despite the short-term effects the new slots in Pennsylvania should have on the Atlantic City market, I'm hardly convinced that Atlantic City is such a bad place to be. And as Harrah's and Caesars combine to own five of the 12 casinos in the market, it's likely that something (or more) will have to be sold.

If that's the case, then Ameristar may also have a shot at Atlantic City, though I'm also not convinced that that's where the company would want to commit its chips at this point.

Detroit
Last month's merger agreement between MGM Mirage (NYSE: MGG  ) and Mandalay Resort Group (NYSE: MBG  ) leaves Mandalay's Motor City casino for sale, as the rule in that market is one property per company. It's not impossible that Ameristar would be interested in Detroit.

Prospects for competition
We probably should have discussed this beforehand.

As the earnings numbers tell, competition does have its bite. In St. Louis, Harrah's recently completed a set of renovations that added a hot new bar and cafe, as well as a new poker room. While Ameristar is still the clear leader, Harrah's improved offering is a clear culprit for the increased marketing costs that cut into margins.

Ameristar faces a similar problem in Kansas City, where Argosy Gaming (NYSE: AGY  ) opened its classy new barge this past December. Even though Argosy -- which is on the other side of the market, mostly taking share from Harrah's -- hasn't kept Ameristar from growing, it is clearly helping make Ameristar pay to do it. Harrah's is also in the process of revamping its operation in Kansas City as well.

So the threat of competition is real, and what has investors worried is the threat of more.

In St. Louis, regulators will award licenses for two new casinos this year -- one in the downtown area about 20 miles east of Ameristar St. Charles, and another in a location south of there. Basically, this is a scenario not so different from the one the company is facing in Kansas City. The interesting thing about that, however, is that Ameristar feels that its competitors (Argosy) are growing the market, bringing first-time gamblers into the market, after which Ameristar will compete for them.

So far, Ameristar's attractions -- the biggest properties, the most penny slots (see Those Pennies Add Up), and the variety of dining options -- have served it well, so such conjecture is not without at least some merit. In addition, the effects will be muted as the demand for gaming continues to grow in these markets.

These new casinos are also still several years away.

Earlier this month, we also discussed the scenario in Omaha. Currently, Ameristar Council Bluffs (on the Iowa side of the river) is the market leader, posting 40.9% market share in the second quarter. Ameristar's competitors consist of a Harrah's casino and hotel, as well as a Harrah's racino.

Up for vote in Nebraska is the legalization of a pair of new casinos, which would be in Omaha on the Nebraska side of the river. This would certainly have an effect on Ameristar's operation.

But there are a couple of items of note. One is that Ameristar believes that it will still have the best property. Contributing to that is the fact that Ameristar currently has the "only AAA Four Diamond-rated hotel in the Omaha area." In addition, Ameristar received approval on July 15 for a $26 million expansion and renovation of the property that will add 9,800 square feet of gaming space, adding 398 more gaming positions. It will also further upgrade the 162 rooms in the hotel.

Lastly, the new casinos are also four or five years away.

In conclusion
The stock is cheap. In Ameristar, you're looking at a company that's dominated its markets. And while competition has spurred increased marketing costs that have in turn cut into margins, the competition hasn't yet stopped Ameristar from developing its brand and maintaining the position it has established. In addition, continued growth in gaming demand should slow the effects of competition.

However, what also seems apparent is that the company will continue to see these effects in cycles, most notably when the new competition arrives in St. Louis and Omaha -- though that is still several years down the road. That said, Ameristar is clearly in a growth stage, and acquisition opportunities abound.

These things take time to develop. But one way or another, Ameristar will pick up assets to diversify its revenue streams and further develop its brand. And I think that Ameristar's ability to do so as a leader makes it a clear buy at this price.

More commentary:

Fool contributor Jeff Hwang owns shares of Ameristar Casinos and International Game Technology. The Motley Fool has a disclosure policy.


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