It's not so much that the quarter was bad; it's that the same thing happened last year.
In August 2002, Ameristar opened its brand new St. Charles in the St. Louis market, almost immediately taking the market-share lead. But pre-opening expenses resulted in an earnings miss, sending the stock down from its April high in the $30 range to the low teens.
This time around, it was a grand re-opening in September following the renovation of its Kansas City facility.
About $1 million in costs associated with a failed bid for Jack Binion's Horseshoe Gaming also hurt. In addition, intense marketing competition from arch-rival Harrah's
As a result, the company lowered its full-year EBITDA projection to between $200 and $202 million from $202 to $210 million. Its free cash flow estimate was also lowered, cut partially by a $10- million increase in expected capital expenditures. No doubt, the two three-screen, 360-degree plasma TVs installed in Kansas City had something to do with that.
As bad as it sounds, this could well be an opportunity.
Following similar renovations at riverboats in St. Louis, Vicksburg, Miss., and Council Bluffs, Iowa (near Omaha), Ameristar has dominated Harrah's and held the leading market position. Operating results at those three properties have also been spectacular, with EBITDA margins well into the 30% to 40% range -- better than industry standard MGM Mirage's
Further, the state of Missouri increasingly looks like it will repeal its inane $500-per-two-hour loss limit rule, which would boost Ameristar's revenues by 15% to 25%. More importantly, this could come without a significant tax increase, if any at all -- a recent study by the gaming commission demonstrated that even a slight tax increase could backfire by bankrupting several casinos in the state.
While this last half of the year looks disappointing, this is a company with a bright future. Ameristar is strengthening its position as an industry leader, with industry-leading EBITDA margins.
It's not a sure thing, but at about 5 times or 6 times next year's free cash flow, the stock has plenty of upside.
Jeff Hwang owns shares of Ameristar Casinos, and can be reached at JHwang@fool.com.