Ameristar Ups Ante, Lowers Outlook

As the competition heats up in St. Louis with the arrival of Pinnacle Entertainment (NYSE: PNK) downtown later this year, Ameristar Casinos (Nasdaq: ASCA), which reported second-quarter earnings Wednesday, has intensified its enhancement program for its Ameristar St. Charles property. In addition to the 400-suite AAA Four-Diamond-quality hotel set to open in December, the company has reconfigured a portion of the casino floor to make way for a new "signature" casino bar attraction and has accelerated the much-needed replacement of the beat-up, two-lane road leading to the casino to coincide with the opening of the hotel.

The signature casino bar should help Ameristar compete with Harrah's (NYSE: HET) iBAR concept at its rival joint just across the river. The company has also taken on additional expenditures of about $0.06 per share for the full year related to the construction of the new five-lane road.

It seems like a lot of expense. But wait, there's more! A "tax adjustment" at the state level resulted in another $0.04 hit to earnings for both the second quarter and the full year, while "lower than anticipated market growth" in its gaming markets cut another $0.04 per share off the full-year outlook. The end result is that management has cut its full-year earnings guidance all the way down to between $1.25 and $1.29 per share from its previous guidance of $1.41 to $1.49 per share. The company also forecasts full-year EBITDA of $264 million to $268 million, rather than $272 million to $280 million.

Because of the rather sharply reduced guidance, Ameristar shares are trading down 10% to $28.65 in Thursday morning trading.

Ameristar's Earnings Guidance

	Previous	New
EBITDA	$272 million-$280 million	$264 million-$268 million
Operating Income	$176 million-$184 million	$169 million-$173 million
Diluted EPS	$1.41-$1.49	$1.25-$1.29

For the second quarter, the company managed to grow earnings before interest, taxes, depreciation and amortization (EBITDA) across the board. Overall, property EBITDA climbed 5.4% to $67 million, as net revenue grew 2.7% to $253.2 million. Management noted that each of its properties outgrew the market average in terms of net revenue with the exception of Kansas City, where rival Penn National (Nasdaq: PENN) recently opened its new hotel at the Argosy Riverside. Excluding the tax adjustment, earnings came in at $0.34 per share, or a penny shy of estimates.

Still, it's hard to really put a positive spin on the earnings. On the earnings call, the company didn't have an explanation as to the cause of the slower-than-anticipated growth, nor did management elaborate on the tax adjustment. And even after this morning's drop, the stock is still trading in the neighborhood of nine times EBITDA, which is high by historical standards.

The flip side regarding Ameristar's valuation is that it's such a strong competitor with a healthy balance sheet. The Resorts East Chicago acquisition, which could close as soon as September, gives added punch to the growth pipeline. Meanwhile, the company is a neatly packaged acquisition target for companies such as Boyd Gaming (NYSE: BYD) and MGM Mirage (NYSE: MGM). The fact that rival Penn National garnered 14 times EBITDA in a cash sale muddies the picture further, as even discounted to present value, Ameristar would probably be worth closer to $40.

For further Foolishness:

1. Ameristar Manufactures Q1 Gains
2. Ameristar Scores East Chicago
3. Ameristar: The Acquisition Strategy
4. Ameristar: Is an Acquisition Imminent?

Ameristar is a Motley Fool Hidden Gems recommendation. Since it was recommended in the November 2005 issue, it has returned 43% vs. the S&P 500's 24%. Find other promising small caps by taking a free 30-day trial today.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool doesn't gamble on its disclosure policy.