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Argosy Stands Tall

By Jeff Hwang - Updated Nov 16, 2016 at 5:13PM

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Argosy's numbers look good despite the brutal Illinois taxes.

The sad reality is that too few people follow casino stocks. Riverboat pure play Argosy Gaming (NYSE:AGY) is one reason they should.

Today, this former Industry Focus (now Stocks 2004) selection reported first-quarter net revenue growth of 12% to $264.1 million. Excluding an expense related to a debt refinancing, earnings per share climbed 26% to $0.63, well ahead of the mean estimate of $0.48 per share. Meanwhile, EBITDA (earnings before interest, taxes, depreciation, and amortization) climbed 16% to $67.3 million.

The numbers look pretty good despite the drag of last summer's new -- and temporary -- tax-rate hikes in Illinois, where the company's properties in the Chicagoland and St. Louis markets account for 30% of net revenues. In fact, revenues climbed at each of Argosy's properties except for those two, where reduced operating hours in response to the tax hike took a toll on revenues.

In the Kansas City market, Argosy's net revenue increased a whopping 62%, thanks to a new barge opened in December. Meanwhile, property EBITDA margin climbed from 23.3% last year to 31.2%. As we noted last week, the new facility has had the effect of taking market share away from Harrah's Entertainment (NYSE:HET), whose property lies between Argosy's and market leader Ameristar Casinos' (NASDAQ:ASCA).

The company's flagship property in the Cincinnati market, Argosy Lawrenceburg, grew net revenues 15% to $112.9 million.

As I said, the numbers look good overall. The only real gripe I have is that Argosy is third-best or worse in the three largest markets in which it competes -- so it doesn't pass my most stringent criteria of being the market leader.

However, the dynamic of the gaming industry is such that it isn't necessary to be No. 1 to be successful, and the numbers bear this out. Kansas City shows that Argosy can win by offering a quality product and dominating its corner of a market, and Chicagoland should prove to be similar once the tax scenario improves.

A Foolish maxim instructs us: "Go with what you know." So, yes, riverboat casino operators like Argosy, Ameristar Casinos, and Isle of Capri (NASDAQ:ISLE) are more accessible to investors familiar with the regions in which these companies operate.

Then again, it's never too late to learn something new. Either way, Argosy may be worth serious consideration.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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