Thanks largely to cost containment initiatives at its St. Charles and Council Bluffs properties, Motley Fool Hidden Gems selection Ameristar Casinos (NASDAQ:ASCA) posted better-than-expected third-quarter earnings. In addition, combined with increasingly significant contributions from the recently rebranded Ameristar Black Hawk -- as well as continued strong post-Katrina business levels in Vicksburg -- the casino operator also put up record bottom-line results for any quarter in the company's history.

Wednesday afternoon, Ameristar reported third-quarter net revenue growth of 6.3% to $253.6 million. Meanwhile, EBITDA increased 12.6% to a quarterly record $69.6 million, net income jumped 31% to a record $21.1 million, and diluted EPS similarly increased 32.1% to $0.37 per share -- ahead of the $0.35 per-share analyst estimate.

In all, it was a very positive quarter. In addition to a healthier-than-expected business performance, the company also took advantage of its temporarily deflated stock price, repurchasing 0.4 million shares for approximately $8 million. The fourth-quarter guidance calling for earnings of $0.24 to $0.26 per share, however, is light compared to the $0.27 per-share analyst estimate, and likely reflects a conservative outlook regarding the Vicksburg market, which we'll discuss in greater detail below.

Some notes on a property-by-property basis:

Council Bluffs
With the rebranding of Harrah's (NYSE:HET) Horseshoe Casino in Council Bluffs, Ameristar has since fallen to the No. 2 position in the three-casino (two owned by Harrah's) market. But Ameristar says that it has at least partially recovered some lost share (two percentage points during the quarter). On the earnings call, CEO Craig Neilsen points out that Ameristar was the only property in the market to achieve its fair share (increasing from 106% to 108%). Meanwhile, cost control helped EBITDA margins increase 5.5 percentage points from the second quarter.

Looking to the future, Ameristar is mulling over options to either replace or expand its riverboat to better compete with the new Horseshoe. While the company hasn't revealed any specific details, Neilsen noted on the earnings call that the company has four different schemes under consideration. Personally, I think the current casino -- the first-generation riverboat which, in my opinion, is in no way capable of competing effectively with the Horseshoe (or at least not for the leading market position) -- will likely be replaced, rather than expanded or left alone altogether.

Council Bluffs Market/Gaming Revenues/Share by Month







































































*Source: Iowa Racing and Gaming Commission

My guess is that we'll probably see a two-level gaming barge along the lines (but probably a little smaller) of what the company has in place in the St. Louis and Kansas City markets (roughly 130,000 to 140,000 square feet of gaming space, 3,000-plus slots, and 100 table games). I also think there's a 100% chance the new casino will be bigger than the Horseshoe (68,000 square feet of gaming space, 1,863 slots, and 62 table games).

St. Charles
In the St. Louis market, Ameristar has fallen behind rival Harrah's, since Harrah's opened its relocated and expanded poker room in March. A marketing war hasn't helped Ameristar's profitability, either. And in the third quarter, Ameristar's decision to cut promotional expenses helped lead to a $400,000 drop in net revenue to just under $71 million, but it also helped property EBITDA increase by over $1 million to $22.9 million. Also, between August and September, Ameristar managed to regain some lost share.

New rival Pinnacle Entertainment (NYSE:PNK) will introduce two new casinos to the market over the next two years. Still, Ameristar is well-positioned, sharing its corner of the market with Harrah's, and Ameristar St. Charles will see dramatic enhancements of its own. In September, the property opened its new conference center (see "Fight Night Restarts Ameristar St. Charles"). The first 1,400 spaces of the property's second parking garage are now slated for an early 2007 availability, with the 400-room all-suite hotel and the remainder of the parking spaces arriving toward the end of next year.

Black Hawk
Ameristar Black Hawk -- rebranded this past April -- saw net revenues double to over $22 million, helping the property increase its share of the Black Hawk gaming market from 9% to 15%. The property is now producing meaningful EBITDA, with EBITDA up to $7 million from essentially nil, and at a healthy 31.4% margin. Neilsen said that he sees 2007 EBITDA in the $30 million range, "give or take a million or two either way." The 536-room hotel is on track for completion in Q4 2008, and Neilsen projects EBITDA at a minimum of $60 million within a year of the hotel's introduction.

The Vicksburg market in general has seen elevated levels of business post-Katrina, helped by the loss of gaming capacity along the Mississippi Gulf Coast to the south. And for the past several quarters, Ameristar management has cautioned that, with the return of more and more casinos to the Gulf Coast -- including Harrah's Grand Casino Biloxi and MGM Mirage's (NYSE:MGM) Beau Rivage in August -- that growth in the Vicksburg gaming market would be significantly curtailed. But at least for the third quarter, Ameristar Vicksburg -- easily the biggest and best-positioned riverboat casino in the market -- still posted relatively healthy gains in net revenue and EBITDA (gains of 11.2% and 17.3%, respectively), and outperformed management's expectations.

While management reminds us that business will return to more normalized levels, the company remains quite bullish on the Vicksburg market. Moreover, the only thing holding Ameristar back is the property's own constraints. Those problems will be fixed, with a casino expansion (adding 800 gaming positions), a new VIP club, and a much-needed parking garage -- all due for completion in Q3 2007.

Nielsen did note on the conference call that the expansion, which originally was supposed to be complete by Q3 2006, has gotten pushed back, in part because of the new law that allows part of the gaming facility to be on land. Nielsen's explanation:

We are implementing a process that as far as we know hasn't been done, at least that anybody knows of. We're actually building up the boat and then ... pouring concrete underground ... to support the facility so it will no longer be resting in the water. And we've had some design issues.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has a disclosure policy you can bet the farm on.