The casino sector has been hammered in 2008 with the stocks being down 60-85% year to date. Regional casino operator Ameristar (NASDAQ:ASCA) offers an opportunity to buy a collection of casino assets, with good relative fundamentals at a bargain price. Ameristar has seven properties in: Kansas City, Mo., St Charles, Mo. near. St Louis, East Chicago, In. near Chicago, Il., Council Bluffs In Iowa and one on the Nevada/ Idaho border. While they are headquartered in Las Vegas, what differentiates them from the Las Vegas based casinos is they have no hotel or casino exposure to the sluggish and highly competitive Las Vegas market.
Ameristar focuses on providing higher quality more personal service where the average gambler is considered a star and the theme is “you are a star”. It does a very good job with direct mail and entertainment to keep customers coming back. Almost all of its properties have meeting and convention space to help fill rooms mid-week. Four of its six properties still charge $100-189 during the week and $149-299 on the weekend, which in this tough environment is a good sign. Regional casinos usually charge $69-99 at the most so they have quality properties. Of course they “comp” rooms and food (give for free) to higher level players in exchange for certain levels of play but as you know, there is nothing “free” in a casino.
In this economy, gamblers who maybe would go to Vegas two or three times a year now might just go once per year to Las Vegas and increase their play at their regional casino. That helps make up for a smaller dollar amount per gambler and effects from a worsening economy. Most visitors to regional casinos drive less than fifty miles so their gasoline costs are much less relative to hundreds of miles or a plane ticket to Las Vegas. Ameristar has not had to cut rates for rooms and has had solid occupancy rates. One big difference between the regional casinos and the Las Vegas major gaming companies is they also get about 80% of their gaming revenue from slot machines instead of table games so their win percentages are more steady and predictable. Slot machines are also less costly (fewer employees) and high rollers at tables can produce heavy variability in quarterly results.
Another key thing is management’s timing with recent investment and expansion of existing properties. The company has completed a $400 investment and expansion of existing properties, is adding a hotel to its property outside of Denver and also has completed an acquisition of its East Chicago property. There is no need for additional financing and the company is focused on its own internal growth at exactly the right time. Other companies in the casino sector have gone into the recession with expensive expansion projects that have had to be delayed, suspended or abandoned due to financing problems. There is a possibility that Ameristar would have to issue new subordinated debt to protect its loan covenants but it is not at risk of halting projects. By next year, it will be ready with all of its capital expansion projects just being completed so it will benefit when the economy recovers.
A possible catalyst for the stock is a voter initiative in Missouri that would raise the loss limits and increase the gaming tax by 1%. The every-two-hour $500 cap on losses puts Missouri casinos at a disadvantage. This would help revenue and profits at two of its larger properties in Missouri. The money is slated to go to education. There will be a statewide vote on this referendum on the November 4th, 2008 ballot.
The other catalyst is the current low level of negative expectations combined with a low relative valuation. In the past, casino companies like Ameristar have traded at three times revenue. With revenue of $1.25 billion and using a lower multiple of 2.75 times revenue, the stock would be worth $17. At three times revenue, it would equal $18.50. At its current price of $11.30, it could have potential upside of 50-63%. The stock trades at only 10.76 times my 2008 estimate of $1.05. My estimates are based on five cents below analyst consensus estimates of $1.10 per share and $40 million less in gross revenue. Most importantly, at an enterprise value of 1.83 in a sector that has changed hands between buyers at 2.5-3.0 times revenue, Ameristar Casinos is a real bargain in the casino sector. I think the stock could reach $17.50 in six to nine months which would be a 50% gain.
Disclosure: Long ASCA.