Argosy Stays Afloat

Midwest riverboat casino operator Argosy Gaming (NYSE:AGY) has announced improved second-quarter revenues and earnings that topped analyst expectations, but the numbers failed to excite a market that greeted the news with a lukewarm reaction. Earnings per share rose to $0.63, or $18.6 million, from $0.24 last year, but both years' totals were affected by charges, writedowns, and other non-recurring events. Excluding these, earnings increased 20% to $0.60 per share on revenues that ticked up 2.5% to $254.6 million.

The stifling gaming and admission taxes imposed in the Illinois markets, which Jeff Hwang lamented earlier this year, again took a toll. Operational steps taken to reduce their impact dropped net revenues at the Alton and Joliet properties 11.9% to $24.6 million and 14% to $53.6 million, respectively. Each of the other four properties saw rising net revenues, ranging from 2.6% at the Argosy Baton Rouge to 58.2% at the Argosy Riverside near Kansas City, which is still reaping the rewards of a new barge. The old boat is currently being renovated to include 60% more gaming space, and it will be put in operation in Sioux City by the end of next month.

Argosy has shown a willingness to spend freely to stay competitive with rivals such as Harrah's (NYSE:HET), Ameristar Casinos (NASDAQ:ASCA), and Isle of Capri (NASDAQ:ISLE), and the strategy has paid off. The company is expecting another $100 million in capital outlays this year for projects that include the conversion all-slot machines to ticket-in, ticket-out (TITO) -- a process that is now 90% complete -- and the expansion of the Riverside property to include a new 250-room hotel and additional parking.

Also on the drawing board is a $150 million expansion project for the Lawrenceburg property. Considering this one casino represented 42% of last quarter's revenues ($108.0 million of $254.5 million) and 56% of EBITDA ($37.3 million of $66.2 million), pouring additional money into the facility is justified. Especially if concerns over legislation allowing slots to be installed in nearby Kentucky racetracks -- such as the one that recently benefited Penn National (NYSE:PENN) in Pennsylvania -- are well-founded.

Argosy has made great strides lately, but the riverboat casino industry is fraught with perils, such as excessive leverage and capricious state legislators that think deep-pocketed casinos are the answer to any budgetary shortfall. If future projects prove as successful as Argosy Riverside, however, the rewards just might outweigh the risks.

Fool contributor Nathan Slaughter enjoys riverboat casinos, as well as land-based casinos, but he has yet to try his hand in a cruise-ship casino. He owns none of the companies mentioned.