Reevaluating Ameristar: St. Louis, Part 2

Previously, we examined the two players dominating the nearly $1 billion St. Louis gaming market (see "Reevaluating Ameristar: St. Louis") -- Motley Fool Hidden Gems selection Ameristar Casinos (NASDAQ:ASCA) and Harrah's Entertainment (NYSE:HET). Combined, the two players in the northwest corner of the market have seen gaming revenues climb from $413.1 million in 2001 to $607.6 million in 2005, a gain of approximately $195 million.

But with new rival Pinnacle Entertainment (NYSE:PNK) set to open a new casino downtown in 2007 and a second casino marking the south end of the St. Louis market in 2008, the key question is how those properties will affect Ameristar in Harrah's to the northwest. And if history is any indication, then the answer is that the effect will be slight.

St. Louis Market Gaming Revenues

Pinnacle's St. Louis City Casino
Next summer, Pinnacle will open its new 75,000 square-foot casino with 2,000 slots and 40 table games in downtown St. Louis, on a site just north of the present President Casino.

The new St. Louis City casino will solve all of the problems that the President Casino has, with a new parking facility, a new high-end 200-room hotel to go with the adjacent hotel that the company has purchased, and a relatively spacious new casino featuring more than double the space of the century-old Admiral riverboat on which the President casino operates. The property will also better capitalize on its location downtown, which is near night-time hotspots, within walking distance of the football stadium (Pinnacle is building a tunnel walkway), in the general vicinity of Busch Stadium, and not far from the Savvis Center (where the St. Louis Blues of the National Hockey League play). In short, Pinnacle is set to dominate the Metro East market of St. Louis.

So, what does this mean for Ameristar and Harrah's? It is important to note two things:

1. Ameristar and Harrah's are about 25 miles apart.

2. Despite the extensive upgrades at Ameristar and Harrah's since 2002 (Ameristar introduced its new gaming barge in August 2002, and Harrah's completed an expansion in July 2004)), the President has seen annual revenues drop less than 10% between 2001 and 2005.

I think that, for the purpose of evaluation, it's quite reasonable to view Pinnacle's new casino as an upgrade of the President (which the company has agreed to purchase out of bankruptcy in order to gain experienced personnel) -- similar to the expansions at Ameristar and Harrah's discussed in Part 1. And viewed that way, the probability is that the competitors that will be affected the most will be the President's closest competitors: the Casino Queen directly across the Mississippi in East St. Louis, and Penn National's (NASDAQ:PENN) Alton Belle on the Illinois side of the River to the north.

Overall, I believe that Pinnacle's downtown property will certainly have some impact on both Ameristar and Harrah's but that the impact will be fairly marginal. And with Ameristar set to open a new hotel during Q4 2007, I think we'll see something similar to the Kansas City market (see Reevaluating Ameristar: Kansas City). In KC, Ameristar completed a renovation/expansion in 2003, followed by the introduction of a new gaming barge at Penn's Argosy Riverside, after which the only competitor in the market to see a decline in revenue was Harrah's in between.

Pinnacle's River City Casino
In the fall of 2008, Pinnacle also plans to open the River City casino marking the south end of the St. Louis market. The casino will be Pinnacle's flagship, and the company's largest, with 90,000 square feet of gaming space, 3,000 slot machines, 60 table games, and 100 hotel rooms. As the only competitor in this area of the market, Pinnacle stands to capture a significant amount of business within its immediate area, and I view the property as a good bet to be the third competitor in the market to do $250 million in annual business.

To the extent that Ameristar and Harrah's should be concerned, the fact is that this property will be located closer to Pinnacle's own property in downtown St. Louis than to Ameristar and Harrah's on the opposite end of the market. In other words, Pinnacle doesn't seem to be concerned about cannibalization. Even so, this property may have a deeper impact on Ameristar and Harrah's than the downtown casino will, as the River City casino will gain much of its business from the residents toward the southwest of downtown -- those who regularly frequent Ameristar and Harrah's.

That said, while Pinnacle's gaming revenues have to come from somewhere, it's important to recognize that much of its business will come from local residents within 5, 10, and 20 miles of the casino who will simply visit more frequently than they had previously visited the Ameristar and Harrah's casinos located farther away from home.

St. Louis , Fall 2008

Casino Queen
The Casino Queen in East St. Louis also deserves some mention, as the current third-largest player in the market. Privately held Columbia Entertainment -- the company that has nabbed Aztar Corp (NYSE:AZR) after a fierce bidding war involving both Ameristar and Pinnacle (see "Pinnacle Gambles on Aztar" and "Gauging Aztar's Value") -- has agreed to acquire the Casino Queen for $200 million. As per ongoing plans, the property will see some $60 million in capital improvements that will include a new single-level barge with 38,000 square feet of gaming space. The casino will likely maintain something similar to its current mix of 1,122 slots and 34 table games due to Illinois' state limit of 1,200 gaming positions per license. The barge is expected to open in mid-2007.

The interesting thing about the Casino Queen is its location. East St. Louis, in general, is one of the shadiest areas of the country. The casino in its current state isn't much of an exception. However, because Illinois doesn't have a loss limit (Missouri has a $500 per-two-hour-per-patron loss limit rule), it's common to see gamblers betting $400 or even $2,000 a hand on blackjack -- something that simply doesn't happen in Missouri.

But aside from the highest limit gamblers, the Casino Queen garners most of its patrons from the east side of the Mississippi River, who are generally less wealthy than those from the Missouri side of the River.

I don't see the expansion at the Casino Queen having much of an effect on Ameristar or Harrah's. What I do see happening is Pinnacle gaining a significant amount of business from the east side of the River. And one of the biggest reasons for this -- other than overall superiority of operations and location -- is the inane position limit in Illinois. Despite its presence near less wealthy clientele, the Casino Queen doesn't have a lot of penny slot machines.

In fact, 1-cent and 2-cent slots make up only 16.3% of all slot machines in the state of Illinois. In Missouri -- where casino operators can place as many slot machines as they want -- penny slots generally account for over 30% of slot machines at some joints, up to a whopping 48.4% of slots at Ameristar St. Charles. I believe that Pinnacle will capture substantial business in the Metro East market simply by being able to offer a much larger collection of penny-denomination slot machines than the Casino Queen.

Final thoughts
Overall, St. Louis is shaping up to be one of the top gaming towns in America in terms of quality. And with the introduction of Pinnacle's two new casinos, I believe that St. Louis is set to eventually leapfrog the Detroit market and the Tunica market in Mississippi as one of the biggest gaming markets by revenue as well.

And while I expect both of Pinnacle's casinos to be very successful, I also believe that Ameristar and Harrah's will still have the two best properties in the market. In general, the location of both properties at the northwest end gives them a formidable defense from any new competition. Moreover, the opening of the hotel in Q4 2007 will give Ameristar one of only three AAA Four-Diamond quality hotels in all of St. Louis, making Ameristar the highest-end gaming property in the market, and likely the destination of choice.

The probability is that the two new casinos will put some pressure on Ameristar. That said, given the quality of Ameristar's operation, the property's coming additions, and the property's distance from the upcoming competition, I'm cautiously optimistic about the company's long-term prospects in this market.

For related coverage, check out:

• Reevaluating Ameristar: St. Louis
• Reevaluating Ameristar: Kansas City
• Ameristar Faces Competitive Pressures

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