Source: Empire Resorts.

Small cap casino company Empire Resorts' (NYNY) share price has been on fire lately, up more than 100% over the past year. It has emerged as a contender for one of New York State's new destination gaming licenses, the receipt of which would dramatically improve the company's profitability. In its bid, Empire Resorts has teamed up with real estate company EPR Properties, a $3 billion owner and operator of properties that are primarily focused on the entertainment and recreational categories. Together, the companies plan to build a multibillion-dollar four-season resort, complete with hotels, restaurants, shopping venues, and a 70,000-square-foot casino.

Naturally, the smell of money breeds competition. Empire Resorts has a bevy of competitors looking to edge it out for one of the coveted licenses, including Caesars Entertainment (CZR), which recently announced its own desire to build a megaresort not far from Empire Resorts' upstate New York location. After a big run off its 2012 lows, is Empire Resorts a good bet?

Not much to look at
At present, Empire Resorts is certainly not much to look at. It operates a single harness racetrack in upstate New York that includes a food and entertainment facility housing roughly 1,100 video gaming terminals and about 20 video table games. While the company has a favorable location, approximately 90 miles north of New York City, it has been a victim of nearby states' rising gambling aspirations. The biggest offender has been Pennsylvania, a state that has 12 casinos and has existing voter approval for two more. In addition, local Native American tribes continue to want to expand their gaming activities, as evidenced by the Mohican Indian tribe's ongoing push to open a casino within five miles of Empire Resorts' facility.

Not surprisingly, Empire Resorts' financial results haven't been particularly noteworthy lately. This is highlighted by the generation of an adjusted operating loss in its latest fiscal year. While the company's revenues were fairly flat compared to the prior-year period, its profitability was negatively affected by the rising promotional costs necessary to maintain its customer market share due to a proliferation of competing venues. The net result for Empire Resorts was weak operating cash flow, hurting its ability to fund additional attractions to draw in greater numbers of customers.

Handicapping the odds
Obviously, winning approval for one of New York's destination gaming licenses would be a boon for Empire Resorts' shareholder value. This explains the upward trajectory of the company's stock price over the past year as its development plans crystallized and it started to receive the requisite local government sign-offs. Unfortunately, it is hard to handicap the odds of ultimate approval given the opaqueness with which the decision-making process seems to be run.

Case in point is Caesars' escapades in the neighboring state of Massachusetts, where the company was vying for one of the state's three casino licenses against a deep roster of competitors including Wynn Resorts and MGM Resorts International. Despite a 75-year history and experience operating casino resorts around the world, Caesars was found to be an unsuitable operator by state investigators, ostensibly due to former ties with a company that was alleged to be backed by organized crime. As a result, the company backed out of the Massachusetts bidding process.

A better way to go
Given the uncertainties in Empire Resorts' bid to win a New York destination gaming license and what a rejection would mean to the company's shareholder value, investors looking for a regional gaming play should probably look for a lower-risk story like Boyd Gaming (BYD -1.10%). With 22 facilities across the country, including a major position in Atlantic City through its Borgata Resort, Boyd Gaming has come a long way from its early days as an owner of off-the-Strip Las Vegas properties. This transformation was helped by its 2012 purchase of Peninsula Gaming, which added a number of casinos in the central U.S. region. 

The benefits of Boyd's business diversification campaign have shown up in its profit statement, highlighted by a 35% increase in adjusted operating income in its latest fiscal year. More important, Boyd Gaming is well positioned to take its fair share of the online gaming segment, having already built up a strong market share in New Jersey, one of the first states to approve the activity.

The bottom line
Empire Resorts is an intriguing investment story if it wins a destination gaming license in New York, since such a resort would likely provide a solid foundation of profit from which to expand the company's base of activities. Given the uncertain odds of success, though, most prudent investors should leave this one to the speculators, and perhaps take a look at Boyd Gaming instead.