Last week, Ameristar Casinos (NASDAQ:ASCA) reported solid growth in the third quarter that surpassed expectations, pushing shares of the riverboat casino operator up 2.4% to close the day at $34.64. But the big news, in my mind, was the company's long-awaited announcement that definitive plans were in the works to put a 300-room, all-suite hotel at Ameristar St. Charles in the St. Louis market.
While all four of Ameristar's riverboat properties reported revenue growth, the only one not to extend its market-leading position was Ameristar St. Charles. In fact, that property lost market share and its market leadership in St. Louis to Harrah's Entertainment (NYSE:HET), which during the past summer opened its second hotel tower, as well as new entertainment and dining facilities.
But it's also true that Ameristar St. Charles, which had dominated the market since opening its new barge in August 2002, is the only Ameristar property competing without a hotel. And in addition to the hotel, the company also announced that it would add 20,000 square feet of meeting facilities, a new entertainment pavilion, and a second parking garage. Construction is scheduled to begin in the first half of 2005.
| St. Louis Gaming Market | ||
|---|---|---|
| Casino | Q3 2003 | Q3 2004 |
| Harrah's | $61.7 million | $75.1 million |
| Ameristar | $68.1 million | $73.2 million |
| Casino Queen | $39.0 million | $40.7 million |
| Alton Belle | $26.9 million | $27.8 million |
| President | $18.4 million | $18.3 million |
Overall, Ameristar reported third-quarter net revenue growth of 7% to $215.7 million. As a result, EBITDA (earnings before interest, taxes, depreciation, and amortization) jumped 18.2% to $59.2 million. Meanwhile, net income grew 39.7% to $16.6 million, or $0.60 per share, ahead of the $0.52-per-share analyst estimate.
Strong property growth
The company's other flagship Missouri operation, Ameristar Kansas City, was the primary growth driver. While revenues at the property climbed 7.3% to $59.5 million, EBITDA production jumped 32.8% to $17.2 million. At the same time, EBITDA margins climbed up to 28.9% from 23.4% last year. And while competing with Harrah's, Argosy Gaming (NYSE:AGY), and Isle of Capri (NASDAQ:ISLE), Ameristar's share of the Kansas City market edged up to 35.4%.
Ameristar also reported impressive growth elsewhere. Ameristar Vicksburg saw net revenues grow 11.5%, improving its market-leading position by 4.9 percentage points to 44.9% in the four-boat Vicksburg, Miss., market. Ameristar Council Bluffs (near Omaha) reported net revenue growth of 9.8%, with market share edging up 1.9 percentage points to 41.3%. In that market, Ameristar competes with a Harrah's riverboat and a Harrah's racino (race track with slot machines).
Property expansion
Ameristar said that it is planning to expand the number of gaming positions at both of the properties, including the addition of poker rooms. The company also detailed plans for the Mountain High Casino in the Black Hawk, Colo., market, the acquisition of which is expected to close at the end of the year (see "Ameristar's Land Grab").
In addition to the $115 million the company will borrow to make the acquisition, Ameristar plans to invest an additional $90 million in capital to transform the property into an Ameristar-quality property. The company expects to introduce cashless slots from companies such as International Game Technology (NYSE:IGT) and WMS Industries (NYSE:WMS), attach additional covered parking, and upgrade and add dining options during 2005. The 300-room hotel project is expected to be completed by mid-2007.
Ameristar is a solid hold
Since we last talked about Ameristar in August (see "SizingUp Ameristar" and "Ameristar: Time to Buy?"), the stock has rebounded off its lows under $25 back to near its all-time highs set earlier this year. That said, the stock has reached the low end of what I consider to be a conservative approximation of fair value of around $35-$40 per share. At that price, the market is assigning Ameristar a moderate enterprise value of around seven times 2004 EBITDA of $225-230 million -- representing a discount to recent acquisitions in the industry, as well as peers Argosy and Penn National (NYSE:PENN).
What's more, the prospect of investor recognition that Ameristar may in fact be a premium player could potentially push the stock's value into the $40-$50-per-share range, reflecting an EV/EBITDA multiple of around eight. It doesn't hurt that the stock pays a $0.50-per-share annual dividend, either. Given that, if you already own Ameristar shares, I think the company's competitive properties make for a worthy hold. However, I also believe that the stock no longer offers a sufficient margin of safety for the pure value investor to buy.
For additional commentary on Ameristar and the gaming industry, check out:
- Those Pennies Add Up
- When a Hit Is Not a Hit
- The Magnitude of Pennsylvania's Slots
- Harrah's Gains, Gamers Lose
Fool contributor Jeff Hwang owns shares of Ameristar Casinos.
