Ameristar's "profitability-over-market share" strategy continues to pay off. Meanwhile, Jeff Hwang is optimistic about the company's prospects in St. Louis, Council Bluffs, Vicksburg, and Vegas.

Motley Fool Hidden Gems selection Ameristar Casinos' (NASDAQ:ASCA) new "profitability-over-market share" strategy continues to pay off. Despite a 14.7% cut in promotional allowances and an accompanying 1.6% drop in gross revenues, Ameristar managed to increase net revenues in the first quarter by 1.2% to $259.1 million while manufacturing an impressive 11.4% increase in EBITDA to $73.8 million. Meanwhile, earnings came in at $0.41 per share, ahead of the $0.37 per-share analyst estimate.

A big contributor to the gains was Ameristar Black Hawk, which has produced strong initial results following the introduction of the Ameristar brand last April. The property saw revenues jump 53% to $22.1 million, helping EBITDA jump from about $2 million to $7.2 million. Meanwhile, the property's market share is up to 16%, from just under 12% when Ameristar first acquired it at the end of 2004. But the table below tells the rest of the story.

Q1 EBITDA Margins

Q1 2006

Q1 2007

St. Charles



Kansas City



Council Bluffs






Black Hawk






That Ameristar Kansas City managed a 31.1% EBITDA margin is encouraging, as that property has long underperformed -- at least compared to the rest of the company's properties by that measure. Ameristar Vicksburg's 45% EBITDA margin is virtually unheard of, especially in the riverboat states. And despite the top four properties all reporting a slight decline in net revenues, the only property to report lower EBITDA was Ameristar Council Bluffs, which was still basically flat at $15.9 million. That's impressive, considering that Harrah's (NYSE:HET) opened its rebranded Horseshoe racino in the market last March, having the advantage as the only land-based casino in the market.

Legislative issues
There are other items of note, particularly on the legislative front. Kansas has passed legislation allowing up to four state-owned casinos and three racinos, of which one casino and one racino would be in the greater Kansas City market. The new competition will likely have an impact on Ameristar Kansas City, although Ameristar has the advantage of being the easternmost, and thus best-protected, property in the market, in addition to already being the premier destination casino property in the market.

The other is the potential removal of Missouri's $500-per-two-hour loss limit rule. This would be of fairly dramatic benefit to Ameristar's top line at both its St. Louis and Kansas City properties. However, the Missouri Senate gave initial approval to the loss limit bill with a 4.25% increase in the gaming tax rate on gaming revenues above $40 million, rather than the 2% increase as initially proposed. Obviously, the industry wants to see the bill pass with the 2% increase, and at least one company -- Penn National (NASDAQ:PENN), which owns the Argosy Riverside in Kansas City -- has expressed that it would like to see the bill passed with a 2% increase or not at all.

Outlook: optimistic
Overall, I have to admit to being pretty optimistic about Ameristar's prospects. Ameristar will see a new competitor in St. Louis when Pinnacle Entertainment (NYSE:PNK) opens up downtown in Q4 this year. However, I expect the effect of Pinnacle's downtown casino on both Ameristar and Harrah's -- which are located roughly 25-30 miles or so west of downtown St. Louis -- to be about the same as the effect that Ameristar and Harrah's had on the two downtown area casinos (the President Casino -- now owned by Pinnacle -- and Casino Queen in East St. Louis) following their expansions, and that's to be a fairly nominal one (see Re-evaluating Ameristar: St. Louis). I also expect that Ameristar's new best-in-market hotel -- slated for a December opening -- would more than offset any losses, while allowing Ameristar to retake the No. 1 market share position. Meanwhile, as the high-end player in both St. Louis and Kansas City, Ameristar stands to benefit the most from the potential removal of the loss limit.

In Iowa, it appears that the next iteration of Ameristar Council Bluffs is going to be a land-based casino rather than relegated to the water, removing any advantage that Harrah's has with the Horseshoe property in the Council Bluffs/Omaha market. We should see an announcement regarding a new project within the next few months.

In Vicksburg, Ameristar is in the process of a $98 million expansion project that will add about 800 new gaming positions and a much-needed parking garage. Despite the constant threat of potential new competitors in the market, Ameristar has a virtually unbeatable location. The company has 46% market share in the four-competitor market and has already chased both Harrah's and Isle of Capri (NASDAQ:ISLE) from the market.

Beyond that, Ameristar's recent $675 million purchase of Resorts East Chicago gives the company's development pipeline a much-needed boost and exclusive access to the third-largest gaming market in the country. The company expects to close on that acquisition later this year, with plans to immediately begin work on a new single-level casino that would open in 2010.

Meanwhile, MGM Mirage's (NYSE:MGM) recent purchase of 34 acres of land adjacent to its Circus Circus property at the north end of the Las Vegas Strip may have presented just the perfect opportunity Ameristar has been waiting for. MGM now has a 78-acre site ripe for development, and the company is seeking partners for a joint venture. I think a joint venture involving both Ameristar and Pinnacle makes at least 99% perfect sense, given Ameristar and Pinnacle's tremendous reach across the regional gaming markets, both companies' need for a Las Vegas destination, and a qualitative match among all three companies.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has a win-win disclosure policy.