Market Neutral Gaming Investing: Long Gaming Partners, Short Ameristar

Includes: ASCA, GPIC
by: David Pinsen

On Wednesday evening, I mentioned to those on the market neutral trade notification e-mail list that I planned to short Ameristar Casinos Inc. (NASDAQ:ASCA) and buy an equal dollar amount of Gaming Partners International Corporation (NASDAQ:GPIC) on Thursday. It turned out that there were no shares of ASCA available to short Thursday, but there are options available for it, so you can establish a synthetic short position in ASCA.

Ameristar Casinos Inc. (1), headquartered in Las Vegas, owns and operates eight casinos spread over several states in the U.S. In August, the company announced that it was looking to be acquired, sparking a rally in the stock, but earlier this month the company announced it was no longer seeking to find a buyer -- presumably, because it couldn't find a willing one at whatever price it was seeking.

Ameristar has an Altman Z"-Score of about 0.26, according to Short Screen (recall that Z”-Scores below 1.1 indicate financial distress). It also has a current ratio of 0.46.

Gaming Partners International Corporation
, also headquartered in Las Vegas, is a picks and shovels play on the casino industry: it manufactures casino tables, roulette wheels, gambling chips (including ones embedded with RFID microchips), and sells its products worldwide.

GPIC has an Altman Z-Score of about 5.9, according to Short Screen. Recall that Z-Scores above 2.99 indicate financial strength. It also has current ratio of 3.91.

In addition to the contrast in financial strength, GPIC has a more attractive valuation than ASCA. Since ASCA has significant net debt, and GPIC has significant net cash, an enterprise value/EBITDA comparison seems appropriate. GPIC has an enterprise value/EBITDA of 2.93 versus 7.83 for ASCA (trailing twelve months, in both cases).

(1) Which apparently hasn't gotten around to building its website yet, and has its domain parked with Network Solutions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. My current brokerage firm doesn't allow synthetic shorting, so I haven't placed this trade yet. I may move the account to a firm that allows synthetic shorting, and place the trade there, but I won't be able to do that for at least a week.