Ameristar Faces Competitive Pressures

On May 4, Ameristar Casinos (NASDAQ:ASCA) reported first-quarter adjusted earnings of $0.35 per share, missing the analyst estimate by $0.02. But of greater consequence is the fact that the company lowered its guidance for the year, and somewhat drastically at that. Now that the revenue numbers are out for the month of April, we can discuss some of the issues further.

You'll see why April is important in a minute. But first, take a look at the revised guidance below:

Revised Guidance

There are three key factors causing the lowered guidance:

1. Vicksburg. With the casinos along the Mississippi Gulf Coast out of commission for much of the third and fourth quarters of 2005 because of Hurricane Katrina, Ameristar Vicksburg -- along with the rest of the Vicksburg, Miss., market -- has been benefiting from heightened levels of business. But with three casinos returning to operation along the Gulf Coast in December to fantastic results -- and several more due back late this summer, including MGM Mirage's (NYSE:MGM) Beau Rivage -- Ameristar now sees business levels in Vicksburg dropping back to more normalized levels sooner than expected. So while EBITDA still climbed 27.7% at Ameristar Vicksburg in the first quarter, the increase was well short of the 50% EBITDA increase experienced in Q4. As such, management attributed some 70% of the first-quarter shortfall on an EBITDA basis to Vicksburg and lowered its expectations for the year accordingly.

2. Competition Part I: Marketing wars in Missouri. While Ameristar held the leading market share at all four of the markets in which the company's Ameristar-branded properties competed, the marketing wars with fierce rival Harrah's Entertainment (NYSE:HET) in St. Louis and Kansas City hurt margins, and thus, profitability. Despite a 5.1% gain in revenues in Kansas City and a 3.6% increase in St. Louis, EBITDA actually declined 6% in Kansas City and was roughly flat in St. Louis.

3. Competition Part II: Council Bluffs and St. Louis. In the first quarter, Ameristar maintained its market-leading positions with 42.1% market share in Council Bluffs, Iowa, and 31.7% share in St. Louis. However, key changes in the market place have caused Ameristar to lose the lead in both markets for the month of April.

Council BluffsThe Council Bluffs, Iowa, market -- located just across the river from Omaha -- consists of a riverboat owned by Ameristar and two Harrah's-owned properties: a Harrah's-branded riverboat and a racino called Bluffs Run.

Until March, neither property presented any threat to Ameristar's long-term lead position in the market. But on March 15, Harrah's opened the Horseshoe Council Bluffs, a full-blown conversion of the Bluffs Run racino. The converted Horseshoe is the only land-based facility in the area; it now features 1,855 slot machines and 56 table games over 100,000 square feet of gaming space on a single floor. This compares favorably to the 1,651 slots, 36 tables, and 38,500 square feet of gaming space found on Ameristar's riverboat.

Ameristar has felt the effects ever since. For the month of April, Horseshoe Council Bluffs took the lead position in the market.

Council Bluffs Market April 2006

*Source: Iowa Racing and Gaming Commission. **AGR, Adjusted Gross Revenue.

St. LouisAt the moment, the St. Louis market is basically a two-horse race between Ameristar and Harrah's at locations to the west of St. Louis. There are also three more marginal competitors: Penn National's (NASDAQ:PENN) Alton Belle to the north on the Illinois side of the Mississippi River, the President Casino ( which is maybe 20 miles or so east of Ameristar and Harrah's in downtown St. Louis), and the Casino Queen across the river in East St. Louis.

That said, Ameristar and Harrah's have been trading time at the top spot ever since Ameristar opened its new 130,000 square-foot casino in August 2002. And as I mentioned on Wednesday, the latest shift in position coincides with the arrival of Harrah's newly expanded poker room, which opened in late March.

Since then, the casinos' clientele has shifted. For example, many of the regular $20/$40 limit hold'em players at Ameristar have taken their play over to Harrah's, where the new $30/$60 game is spread now almost on a daily basis. And starting next Saturday, the regular Pot-Limit Omaha game that has been played at Ameristar since before Harrah's even opened a poker room will now be moved over to Harrah's (the game will still be played at Ameristar on Mondays).

Obviously, it's not just the biggest gamblers who have changed venues.

While poker-room revenues represent just a fraction of the overall casino business, it should be noted that the biggest poker games also attract some of the biggest gamblers. Moreover, many poker players tend to play three or four times a week -- more than the average gambler. Plus, it's a safe assumption that poker players have spouses and friends who may also bring action elsewhere in the casino.

We only have a month of data so far, but I think that one of the key figures is that admissions for the month of April were down 9.2% year over year at Ameristar, but only flat at Harrah's. Also for the month of April, Ameristar actually saw overall gaming revenues decline 3%, while Harrah's saw revenues climb 5% -- good enough to take the market-share lead.

St. Louis Market April 2006

*Source: Missouri Gaming Commission. **Pending acquisition.

Long-run implications?In the long run, I'm still very bullish on Ameristar's market-dominating property in Vicksburg, with its vastly superior location in the market. That property will also see a new parking garage, a second hotel adjacent to the casino, and a much-needed expansion of the riverboat to satisfy healthy gaming demand.

In Missouri, it should be noted that the marketing wars between Ameristar and Harrah's have been going on sporadically for some time, and we can expect this to continue. Otherwise, in St. Louis, it's likely that the competition will continue to further dampen profit growth -- at least until Ameristar opens its hotel in late 2007. Of course, around that time, Pinnacle Entertainment (NYSE:PNK) will have opened its property downtown, with a second casino toward the south of St. Louis coming online in 2008. That said, I still believe that Ameristar has the best property, and it should be noted that the two upcoming competitors are both on the opposite sides of town from Ameristar and Harrah's.

In Kansas City, Harrah's has a similar ongoing expansion effort as in St. Louis. That said, the competition isn't really close, and Ameristar still has the dominant property in that market by far.

Lastly, I don't see the situation in Council Bluffs changing anytime soon. Ameristar's one key advantage is the 444 hotel rooms on the property; the Horseshoe doesn't have a hotel. It's likely that Ameristar's riverboat will require expansion, if not outright replacement. But for the time being, Ameristar is now thinking in terms of fair share (revenue per position) as opposed to market-share lead.

Ameristar remains a holdOverall, I still believe that Ameristar is a long-term hold. This is the first time I've really felt that Ameristar has been outcompeted by Harrah's in Council Bluffs -- if not St. Louis as well. However, the gaming business isn't going anywhere, and Ameristar still has key locations as a top competitor in every market in which it competes. Moreover, Ameristar unleashed its newly rebranded Ameristar Black Hawk (near Denver) on April 1, which should provide decent gains.

At this point, I believe the stock remains fully valued at around $22 per share, or an enterprise value around 7.6 times 2006 EBITDA. Having said that, I also recommend any purchase made at a greater discount -- or margin of safety -- than before.

Ameristar is a Motley Fool Hidden Gems recommendation. Subscribers can access Jeff Hwang's look at Ameristar's first-quarter earnings report. Take the newsletter dedicated to small caps for a 30-day free trial.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has an ironclad disclosure policy.