Re-Evaluating Ameristar: Kansas City

Since the first time I highlighted the stock three years ago, virtually every discussion on the recent Motley Fool Hidden Gems selection Ameristar Casinos (NASDAQ:ASCA) has centered on the riverboat casino operator's leading market position in every market in which the company competes. So when the company lost its top position in the St. Louis and Council Bluffs, Iowa, markets in April, I had to lend an eye of concern as a shareholder (see "Ameristar Faces Competitive Pressures"). And especially with the stock falling toward an attractive level at a recent price under $20 per share, now is the time to fully reevaluate the company's long-term prospects.

The real question here is whether or not Ameristar's loss of the leading positions is reflective of a permanent competitive deficiency. My best guess is that the answer is "no."

Here in Part I of a re-evaluation of Ameristar, we'll take a look at Ameristar's dominating position in the Kansas City market. And using Ameristar's more mature Kansas City property as a proxy, I'll explain why investors might be more optimistic about the company's position in the St. Louis market in Part II, with a similar evaluation on Ameristar's slightly more complicated future in Council Bluffs and Black Hawk in Part III.

Nothing is stagnant
Before we talk about Kansas City, the first thing to be realized is that nothing in the gaming business is stagnant. In August 2002, Ameristar hit a home run in the St. Louis market with its new St. Charles casino -- a grand replacement for the smaller riverboat originally built by Station Casinos (NASDAQ:STN), from which Ameristar acquired the property in December 2000. Ameristar has mostly led the market since, though rival Harrah's Entertainment (NYSE:HET) has made significant additions and modifications to its own property nearby and has taken the market lead at times, only to cough it up again. But Harrah's opened its newly expanded and relocated poker room in March and has held the leading market position in both April and May.

Second, beyond the "arms-race" nature of the competition, it's also important to note that this is not a zero-sum game. In many cases, new and improved casinos have served to grow their gaming markets, providing a bigger pie for which to compete. A good example is the Las Vegas Strip market, where new properties continually attract more and more visitors.

The third item of discussion here is location. We've discussed the importance of location to a casino's performance on several occasions, usually in relation to a casino's primary market. But in addition, after having made the trip from St. Louis to Kansas City to Council Bluffs to Deadwood (South Dakota) and back, I've begun to think that it would pay to give more thought to a casino's location relative to the pass-through or destination tourist.

Kansas City gaming revenues

The Kansas City market
Ameristar Kansas City dominates the $700 million Kansas City gaming market by a healthy margin, pulling in $259.4 million of gaming revenue over the past 12 months. The Ameristar facility is arguably the most complete property in the riverboat gaming industry, with 11 restaurants, a 1,400-seat entertainment facility, an 18-screen movie theater, an arcade, a child-care center, and a 184-room hotel, along with more than 7,000 parking spaces. The Amerisports bar concept is perhaps the property's most compelling asset, and the casino is also the biggest in the riverboat industry, with over 3,000 slots and 99 table games over a whopping 140,000 square feet of gaming space.

As the easternmost property in the market, Ameristar also has the best location from a traveler's standpoint. Coming from I-70 from St. Louis, the Ameristar riverboat is about 7 miles up I-435, and about a mile off of that highway. That location is also the most accessible going to and coming from Omaha to the north.

Harrah's North Kansas City is the top second-best player in the market, with a central location compared to its competitors. The property is just four miles to the west of Ameristar, and only a couple of miles off of the same I-435 exit. Harrah's is also just a couple of miles east of I-29/I-35. Harrah's, currently operating a two-level riverboat with 1,850 slot machines and 62 table games, has raked in $200.4 million in gaming revenue over the past 12 months.

Penn National's Argosy Riverside has a nice location at the west end of the gaming market, roughly nine miles west of Harrah's. It's also located halfway between the Kansas City International Airport and downtown Kansas City. Argosy has been a steady performer since opening a new single-level gaming barge in December 2003, and what exists there today is completely unrecognizable compared to the bare riverboat property that previously operated there. Argosy has since added a new parking garage, put some finishing touches landscaping the property, and is now in the process of building a 258-room hotel slated to open during the second quarter of 2007. The property, with 1,807 slot machines and 40 table games, also just opened a new poker room at the end of May aimed at stealing Isle of Capri's poker business.

Feeding on the low end of the market, Isle of Capri is the southernmost casino, located off I-35 just across the river from Harrah's. It's also the closest casino to downtown Kansas City. The property saw revenues fall to $92.3 million over the past 12 months from $101.5 million in the previous year, largely because of the closing of the I-35 bridge from May 17 last year through the end of August. The company announced an $85 million expansion of the facility this past January, which will see the addition of 400 slots on the second floor, a 1,000-space extension of the parking garage, and a new front entryway, among other things. However, Isle of Capri is the only casino in the market operating without a hotel, or plans for one.

Competition in KC
Aside from an extraordinary set of non-gaming amenities, what separates Ameristar from its competitors is its ability to compete for the complete range of business, from high-stakes gamblers all the way down to small-stakes retail slot players. As we've discussed previously, part of this is the company's emphasis on having the most penny slots in every market (see "Those Pennies Add Up"). Facilitated by its expansive gaming floor, Ameristar KC houses over 1,400 penny slots. In comparison, the other three players have between 700 and 815 penny slots each. This is a key area, as penny play accounts for almost half of Ameristar's slot business.

Excess penny slots also account almost entirely for the difference in performance between Ameristar and Harrah's.

The second item worthy of mention is Argosy Riverside. When Argosy introduced its new barge in December 2003, the property effectively grew the market by 10% in 2004. In fact, both Ameristar and Isle of Capri also grew revenues in 2004. Only Harrah's in the middle of the market got pinched in between the increased competition, from which it's only now recovering.

Moreover, the impression I get is that neither Argosy nor Isle of Capri really fashion themselves as direct competitors for Ameristar's business. Where Harrah's and Ameristar are in the midst of a fierce profit-pinching marketing war, Argosy seems satisfied competing for its fair share of the market. One other illustration of this is that neither Argosy nor Isle of Capri would upgrade my player's card when I presented my black (elite level) Ameristar players card. In contrast, both Harrah's and Ameristar have (or will have, in the case of Harrah's newly revamped Total Rewards program) players club tier matching.

Final thoughts
Ameristar is clearly the class of the Kansas City market, and the usual key themes here are location, non-gaming amenities, a large-scale gaming facility with a massive number of penny-denomination slot machines, parking spaces, and a hotel. That said, the property is mature, and I expect growth going forward to be moderate. The next big catalyst would likely be Missouri's potential repeal of the state's inane $500-per-two-hour loss limit rule, an outcome I think is inevitable (though it has been "inevitable" for some time). However, the removal of the loss limit would also dramatically increase the value of the property.

And just as importantly to this discussion, the other thing to take away is what the dominance of the fully developed Kansas City property says about the prospects for its even more profitable Ameristar's St. Louis property still in its relative infancy, with a AAA Four-Diamond quality 400-room, all-suite hotel and spa, a 55,000-square-foot conference and meeting center, and 2,350 additional parking spaces on the way over the next six quarters.

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