The average investor has a huge advantage over Wall Street analysts. The Wall Street guy has to take a given set of companies and assign values to every company in that group. But as individual investors, our job is much simpler: We don't need to find every single stock that goes up; we just have to pick the high-percentage opportunities that make sense to us and hit them hard.
For Foolish investors, this generally means finding companies with strong competitive characteristics in an attractive industry, and with a sufficiently underappreciated stock.
When I began looking at gaming stocks a little more than two years ago, the one company that fit the bill perfectly was riverboat casino operator Ameristar Casinos (NASDAQ:ASCA). Ameristar was on its way to having the market-share lead in every market where it competed, was about to generate positive free cash flow after completing a couple of large construction projects in St. Louis and Kansas City, Mo., and had a relatively solid balance sheet -- for a casino operator. At the same time, its stock traded with a valuation on par with the weaker companies in the industry -- a clear mismatch between stock price and company value.
Since then, the stock has more than tripled. But it wasn't until this past Friday that the stock price finally reflected the company's value.
Fourth-quarter outperformance boosts stock
After the bell on Thursday, Ameristar reported stronger-than-expected fourth-quarter results. That news sent its shares up 11% on Friday to an all-time high of $49.55. The company saw revenues climb 8.9% to $214.7 million, driving earnings before interest, taxes, depreciation, and amortization (EBITDA) up 18.3% to $57.1 million. Meanwhile, net income checked in at $14.5 million, or $0.52 per share, ahead of the analysts' $0.45-per-share estimate.
Ameristar reported gains across the board, with net revenues, operating income, and EBITDA climbing at all four riverboat casino operations, as well as at its properties in Jackpot, Nevada. On Dec. 21, the company also completed its acquisition of the Mountain High Casino in Black Hawk, Colorado, near Denver. That operation contributed $2 million in revenues and $1 million in EBITDA over the last 11 days of the year.
For the full year, Ameristar held the market-share lead in every market in which it competed. But it lost the lead in the St. Louis market during the third quarter, as archrival Harrah's Entertainment (NYSE:HET) completed significant upgrades to its property. Elsewhere, Ameristar extended its market-share lead in the Kansas City and Vicksburg, Miss., markets. Ameristar also maintained its lead in the Council Bluffs, Iowa, market (directly across the river from Omaha, Neb.), despite seeing its market share slip by 0.5 percentage points from Q4 2003.
Q4 Market Share
| Market | 2001 | 2002 | 2003 | 2004 |
|---|---|---|---|---|
| St. Louis, Mo. | 19.9% | 29.4% | 32.0% | 31.3% |
| Kansas City, Mo. | 32.5% | 34.3% | 35.7% | 36.1% |
| Council Bluffs, Iowa | 37.6% | 39.4% | 40.1% | 39.7% |
| Vicksburg, Miss. | 35.5% | 40.2% | 43.5% | 45.0% |
Revenues for the full year increased 9.3% to $854.7 million, leading to a 14.3% gain in EBITDA to $232.7 million. The company expects fiscal 2005 EBITDA to climb to between $254 million and $262 million, with diluted earnings per share of $2.34 to $2.51.
Ameristar expects first-quarter EBITDA of $62 million to $64 million, with diluted EPS of $0.58 to $0.63.
Stick to the opportunities that fit
It's easy to point to the stocks that caution caused you to "miss out" on. Wynn Resorts (NASDAQ:WYNN) and Mandalay Resort Group (NYSE:MBG) are two good examples of high-flying stocks that I passed on either because of valuation risk (both Wynn and Mandalay) or heavy insider selling (Mandalay). But the bigger foul would have been to suggest buying a stock without being able to justify it.
For as long as I've been following the company, Ameristar has traded at a discount to its peers, and at a fairly significant discount to industry merger deals involving companies with similar characteristics. These deals include the September 2003 acquisition agreement between Harrah's Entertainment and Horseshoe Gaming, as well as the deal between Penn National (NASDAQ:PENN) and Argosy Gaming (NYSE:AGY) this past November. But today, with an enterprise value at about 8.8 times 2004 EBITDA of $232.7 million, Ameristar's is roughly on par with Penn's, pending Argosy acquisition at 8.5 trailing EBITDA.
Ameristar's value is actually a little understated by that comparison, since its EV includes $115 million in debt that it used to acquire the Mountain High Casino, while the EBITDA figure includes only the $1 million contributed during that property's last 11 days of operations in 2004. But to me, this signifies that Ameristar has finally received the respect that it has earned.
That said, it also means that the stock is not a buy at this price.
| EV/EBITDA Multiple* | 6x | 7x | 8x | 9x |
|---|---|---|---|---|
| Stock Price | $29.23 | $38.13 | $47.04 | $55.95 |
*Assumes 2005 EBITDA of $250 million.
For related coverage on Ameristar Casinos, check out:
- When Competition Hurt the Game
- Ameristar Is a Hold
- Sizing Up Ameristar
- Ameristar: Time to Buy?
- Those Pennies Add Up
- Easy to Buy Ameristar
- Ameristar Gets Cheap
Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Motley Fool has a disclosure policy.
