N. Canal Street, Suite 1101 Chicago, IL60606
Ameristar Casinos (ASCA–NASDAQ) $31.29
Note to the Reader: All New or revised material since the last reports ishighlighted.
Reason for Report: News Update & Dropped coverage by 1 Broker Previous Edition: May 16, 2007
Recent Events
On June 1, 2007 Ameristar Casinos, Inc. proposed to invest approximately $100 million in an expansion project at the Company's Council Bluffs property.
On May 15, 2007, Ameristar Casinos, Inc. announced that its Board of Directors has declared a quarterly cash dividend of $0.1025 per share, payable on June 15, 2007, to stockholders of record as of June 1, 2007.
On May 1, 2007, Ameristar Casinos, Inc. reported its first quarter 2007 earnings results, with all-time records of net revenues, operating income, net income, and diluted earnings per share. Net revenue was $259.1 million in 1Q07. Net income reported was $24.0 million, or $0.41 per share.
Overview
Analysts have identified the following factors for evaluating investment merits of ASCA.
Key Positive Arguments / Key Negative Arguments- The company recently outlined aggressive expansion plans for its Black Hawk, St. Charles, Vicksburg, and Council Bluff locations.
- Management’s focus on gaining market share and posting above-average ROE appears to be relentless (given new CAPEX plans).
- ASCA stressed its preference for internal growth projects, citing higher expected returns from acquisitions.
- The company faces fierce competition in almost every market it serves.
- Aggressive capital spending might adversely impact the company’s cash flow in the near term.
- U.S. casino markets are subject to potential regulatory, tax, and legislative changes that could affect profitability.
- Legalization of gaming in Kansas will impact Kansas City property.
Ameristar Casinos, Inc. (ASCA) is a leading Las Vegasbased gaming and entertainment companyknown for its premier properties characterized by innovative architecture, state-of-the-art casino, and superior dining, lodging, and entertainment offerings. Founded in 1954 in Jackpot, Nevada, Ameristar has been a public company since November 1993. The company has a portfolio of seven casinos in six markets: Ameristar St. Charles (greater St. Louis); Ameristar Kansas City; Ameristar Council Bluffs (Omaha, Nebraska, and southwestern Iowa); Ameristar Vicksburg (Jackson, Mississippi and Monroe, Louisiana); Mountain High in Black Hawk, Colorado (Denver Metropolitan area); and Cactus Petes and Horseshu in Jackpot, Nevada (Idaho and the pacific Northwest). Additional information on ASCA is available atits website ASCA’s fiscal year ends on December 31.
Revenue
ASCA reported net revenue of $259.1 million, up from $256.1 million as in 1Q06. As per Zacks Digest report, consolidated net revenue was $259.1 million in 1Q07, an increase of 1.2% y-o-y from $256.1 million in 1Q06.
In 1Q07, Ameristar Black Hawk continued to experience momentum, as evidenced by significant growth in business volume and strong financial results since its re-branding on April 1, 2006. ASCA’s Black Hawk casino was the primary driver of revenue growth, with revenues up 54% y-o-y, as 1Q06 was negatively impacted by construction disruption. Partially offsetting strength in Black Hawk was a y-o-y decline in revenues at ASCA’s casinos in Missouri and Iowa, which were negatively impacted by inclement weather during January and February.
In 1Q07, Vicksburg, net revenue decreased 3.9% as results continue to reflect somewhat normalizingtrends from the elevated volumes caused by Katrina in 2005. These trends are expected to continue to moderate over the next couple of quarters, as additional properties come back on line. Despite recent severe snowstorms in January, the re-branded Ameristar Black Hawk in Colorado generated solid revenue of $22.1 million in 1Q07. At the Council Bluffs, revenue decreased 4.4%.
ASCA’s market share has increased by 37% to 16% since the acquisition of the Black Hawk property, demonstrating strong guest preference for the Ameristar brand. This share increase is further evidence of the success of business strategy, which is generating impressive returns for the shareholders.
One analyst (CIBC) anticipates that the Black Hawk property has increased the market share of the property by approximately 500 bps since its acquisition. Further, the analyst expects this property to continue to perform well leading into the expansion completion in 2009.
Revenue($ in Millions)FY ends December / 1Q06A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009E
Casino / $262.2 / $258.8 / $255.0 / $263.1 / $256.3 / $1,033.2 / $1,456.2
Food & Beverage / $34.2 / $32.9 / $34.8 / $36.4 / $35.1 / $139.2 / $128.2
Room / $6.6 / $6.6 / $6.8 / $8.4 / $9.7 / $31.5 / $86.8
Others / $6.9 / $6.9 / $7.4 / $7.6 / $7.3 / $29.2 / $42.0
Promotional Allowance / ($53.9) / ($46.0) / ($48.5) / ($50.5) / ($49.6) / ($194.5) / ($252.5)
Total Revenue / $256.1 / $259.1 / $254.7 / $262.8 / $253.6 / $1,030.3↓ / $1,300.7↓ / $1,505.1↑
Digest High / $256.1 / $259.4 / $258.3 / $269.9 / $261.2 / $1,045.4 / $1,471.1 / $1,597.0
Digest Low / $256.1 / $259.1 / $250.9 / $255.0 / $245.7 / $1,012.3 / $1,080.4 / $1,388.0
Year-over-year Growth / 1.2% / 3.3% / 3.6% / 3.9% / 3.0% / 26.2% / 15.7%
Sequential Growth / 6.2% / -1.7% / 3.2% / -3.5%
Margins
In 1Q07, consolidated operating income grew 14.3% to $49.9 million versus $43.7 million. EBITDA in the quarter increased 11.4% y-o-y to $73.8 million, versus $66.2 million as in 1Q06. This was driven by a 2.6% increase in EBITDA margin. EBITDA margin was 28.5% of sales, an increase of 100 basis points from the prior-year period. The company posted strong y-o-y EBITDA growth despite a decline in revenue, which implies that management is executing on strategies to focus on profitability over market share.
As per Zacks Digest report, EBITDA increased in 1Q07 to $74.54 million, with a margin of 28.8% of sales. Operating Income increased from $43.7 million in 1Q06 to $50.2 million in 1Q07.
Ameristar Black Hawk was a significant driver of improved EBITDA y-o-y in 1Q07. It also benefited from the absence of construction disruption that adversely impacted performance in the first quarter of 2006. The first key driver is demonstrated by the impressive performance of Ameristar Black Hawk, which is the most significant contributor to our growth in EBITDA.
In 1Q07, EBITDA increased 4.1% y-o-yto $25.0 million, implying a margin increase of 200 basis points at the St. Charles properties. Kansas City posted an EBITDA margin of 31.1% and margin expansion of 310 basis points, while at Jackpot; EBITDA increased 23.8% to $4.5 million in the quarter. EBITDA increased 1.8% to 15.9% y-o-y in Vicksburg, and the re-branded Ameristar Black Hawk in Colorado generated EBITDA of $7.2 million in 1Q07. At Council Bluffs, EBITDA decreased by 0.6% y-o-y in the quarter to $15.9 million.
Based on the preliminary results of operations in April 2007 and outlook for the remainder of the quarter, the management estimates operating income of $42 million to $44 million, EBITDA of $66 million to $68 million (given anticipated depreciation expense of $24 million), interest expense of $12 million for 2Q07. For FY07, management has guided EBITDA to a range of $272–$280 million.
ASCA plans to double EBITDA in the next 3–5 years, splitting the growth evenly between projects at its existing facilities as well as through acquisition. ASCA will center on opportunities where applying the company’s business model will achieve upside.
Another analyst (Buckingham) expects EBITDA growth to moderate for the remainder of 2007 as ASCA faces the cost cutting initiatives and as Y-o-Y comparisons become increasingly difficult. One analyst (CIBC) has raised FY07 and FY08 EBITDA estimates from $279.4 million and $326.3 million to $288.0 million and $377.0 million, respectively.
Margins / 1Q06A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009EEBITDA / 26.1% / 28.8% / 27.3% / 27.9% / 27.2% / 27.8%↑ / 26.8%↑ / 26.4%↓
Operating / 17.0% / 19.4% / 17.6% / 18.5% / 17.1% / 18.1%↑ / 17.9%↑ / 17.6%↓
Pre-Tax / 1.8% / 15.1% / 13.1% / 14.1% / 12.4% / 13.7%↑ / 11.8%↑ / 11.4%↑
Net / 1.0% / 9.3% / 8.0% / 8.7% / 7.6% / 8.4%↑ / 7.1%↑ / 7.0%↑
Earnings per Share
Net Income in 1Q07 was $23.9 million, up from $2.6 million as in 1Q06. Reported Earnings per share was $0.41 versus $0.05 in 1Q06. As per Zacks Digest report, reported net income increased to $24.1 millionin 1Q07from $2.6 million in 1Q06. Pro-forma EPS was $0.41 versus $0.35 in 1Q06. GAAP EPS was $0.41 per share versus $0.05 as in 1Q06.
Based on the preliminary results of operations in January 2007 and the outlook for the remainder of the quarter, management anticipates diluted earnings per share guidance of $0.32 to $0.34 for 2Q07. For FY07, management continues to anticipatediluted earnings per share guidance at $1.41–$1.49.
One analyst (Brean Murray) has raised FY07 EPS estimates from $1.45 to $1.54 to reflect Ameristar’sstronger-than-expected 1Q07 and strategy change that has resulted in lower promotional expenses and improved margins. Further, the analyst has introduced FY08 EPS of $1.56, based on the expectation that increased competition in St. Louis will reduce returns on Ameristar’s new hotel while additional competition from Kansas casinos could limit growth in Kansas City.
Another analyst (Buckingham) has raised FY07 EPS estimate from $1.42 to $1.45 to reflect the positive 1Q07 variance, partially offset by higher corporate expense run-rate assumptions. One analyst (Nollenberger) has further revised its FY08 and FY09 EPS estimates to more accurately reflect management’s focus on profitability and less on market share.
EPSFY ends December / 1Q06A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009E
Digest High / $0.35 / $0.44 / $0.38 / $0.44 / $0.38 / $1.62 / $1.91 / $2.13
Digest Low / $0.35 / $0.41 / $0.33 / $0.36 / $0.31 / $1.41 / $1.41 / $1.45
Digest Avg. / $0.35 / $0.41 / $0.35 / $0.39 / $0.33 / $1.49↓ / $1.62↑ / $1.84↑
Digest YoY Growth / 17.7% / 9.9% / 4.7% / 7.0% / 10.5% / 8.4% / 13.6%
Sequential Growth / 31.9% / -14.4% / 10.3% / -14.1%
Company Guidance EPS before FAS123(ESOE)
Company Guidance EPS after FAS123(ESOE) / $0.32-$0.34 / $1.41-$1.49
Company Guidance (GAAP)
Zacks Consensus / $0.35 / $0.39 / $1.47 / $1.58
The average of EPS estimates for 2Q07 by analysts in the Digest survey with published forecasts remains at $0.35 per share. Individual analysts’ forecasts range from $0.33 (Morgan Joseph, Jefferies) to $0.38(Nollenberger). For FY07, analysts’ EPS forecasts range from a low of $1.41 per share (Jefferies) to a high of $1.62 per share (Nollenberger), with a Digest average of $1.49 per share (↓versus the previous estimate of $1.50).
For FY08, analysts’ EPS forecasts range from a low of $1.41 per share (B. of America) to a high of $1.91per share (Coker & Palmer), with a Digest average of $1.62 per share (↑versus the previous estimate of $1.59). For FY09, analysts’ EPS forecasts range from a low of $1.45 per share (B. of America) to a high of $2.13 per share (Coker & Palmer), with a Digest average of$1.84per share(↑versus the previous estimate of $1.74 per share).
Target Price/Valuation
Of 14analysts, 5gave Positive ratings, 9have rated the stock as Neutral, and none of the analyst has given a Negative rating on the stock.
Target prices range from $30.00 (CIBC) to $38.00 (Coker & Palmer). The Digest average target price is $35.06 (↑from $34.65 in the previous report). Most of the analysts have based their target price valuation on EBITDA estimates.The analyst with the lowest target price (CIBC) used FY08 estimates for valuation metric and the analyst with the highest target price (Coker & Palmer) did not provide any valuation metric.
Rating DistributionPositive / 35.7%
Neutral / 64.3%
Negative / 0.0%
Digest High / $38.00
Digest Low / $30.00
Avg. Target Price / $35.06↑
Analyst with the target price/ Total analyst / 9/14
Capital Structure/Solvency/Cash Flow /Governance/Other
ASCA ended 1Q07 with $95 million in cash. Debt decreased slightly in the quarter to $879 million, leaving ASCA with a low debt to LTM cash flow ratio of about 3.2x. Interest coverage was at 4.5x. The company had remaining borrowing capacity of $310 million, and access to an available revolver add-on of $400 million. ASCA spent $58.8 million on capex in 1Q07, including $7.8 million at Black Hawk, $29.5 million at St. Charles, and $3.2 million Vicksburg.
One analyst (J.P. Morgan) forecasts free cash flow at roughly $165 million, or approximately $2.80 per share for FY08. For FY07, the company forecasts $190 million of cash from operations, $950 million of capital expenditures (resorts acquisition, maintenance, Black Hawk, St. Charles, Vicksburg), $4 million of required principal payments, and $24 million of dividends, which should leave ASCA with year-end debt of $1.68 billion, or 5.8x debt to LTM EBITDA.
For FY08, ASCA is expected to generate cash from operations of about $240 million, spend approximately $235 million on capex, and pay $24 million in dividends, leaving year-end debt of approximately $1.6 billion and 4x debt/EBITDA. Another analyst (Deutsche Bank) forecasts that the company expects expansion capital expenditures of $245 million, down from $270–$300 million reflecting a delay at Black Hawk for FY07.
On April 3, 2007, ASCA entered into a definitive agreement with Resorts International Holdings, LLC to acquire its subsidiary that owns and operates Resorts East Chicago for $675 million in cash. Due Diligence was completed on April 22, 2007. Resorts East Chicago acquisition is expected to complete in 4Q07, subject to the receipt of various regulatory approvals and the satisfaction of other customary closing conditions. Resorts East Chicago is located in East Chicago, Indiana, an approximately 25-mile from downtown Chicago, Illinois, and is easily accessible from the entire Chicago metropolitan area. The Chicagoland market is the third largest commercial gaming market in the United States, generating more than $2.5 billion in gaming revenues annually, and serving approximately 6.4 million adults.
Construction continues on the 400-room, all-suite hotel at Ameristar St. Charles. The hotel will have an indoor/outdoor swimming pool and a 7,000 square-foot full-service spa. This project also includes 19,200 square feet of meeting and conference facilities that was completed in 3Q06 and an additional 2,000-space parking garage, half of which was opened in February 2007. The remaining spaces are scheduled to be completed along with the hotel in December 2007. The project remains on budget ($265 million) and on schedule. The $98.0 million casino and parking expansion project at Ameristar Vicksburg continues to progress.
The project consists of dry-docking the vessel and adding 800 gaming positions, two new restaurants, a VIP club, retail space and a 1,000-space parking garage. The project is expected to be completed in March 2008, on schedule and on budget. Construction is also proceeding on the 537-room, four-diamond-quality hotel at Ameristar Black Hawk, albeit at a reduced pace. The project's estimated cost is $220.0 million, and it is scheduled for completion in 2H09. As previously reported the project may experience additional delays and/or cost increases due to unknown site conditions.
Analysts remain confident in the ability to complete ongoing internal capital projects, including the initiatives at St. Charles, Black Hawk, and Vicksburg.
Potentially Severe Problems
There are none other than those discussed in other sections of this report.
Long-Term Growth
The average long-term growth rate remain at9.9%. The growth rate ranges from 7.0% (B. of America) to 15.1% (CIBC).
The company has taken steps to pursue several internal areas of growth. In addition to the internal capital expenditure projects, management continues to aggressively pursue external expansion opportunities in an attempt to further broaden the overall distribution channels, and increase scale,and diversification that can support the long-term growth plans. The company is focusing primarily on the potential acquisition of existing cash flow producing casino-entertainment properties in the United States,which is expected to improve through the implementation of the development and operational expertise. New developing opportunities in existing and emerging domestic and international markets are also to be looked upon. In the longer term, the company contemplates larger scale development projects in major national and international markets.
Management also broadly outlined its criteria for acquisitions citing:(1) a cash on cash return targetof 15% withinthe first 3 years,(2) EPS accretion within the first two years, and (3) geographicdiversity as major components to the decision-making progress. In addition, managementhas noted the timeline for accretion could be stretched out longer for a larger scale strategicacquisition.
Following the unexpected death of Craig Neilsen, investors have been waiting for an updateonAmeristar’s strategic direction. Craig Neilsen owned approximately 31 million shares, or 56% ofAmeristar Casino stock,which are now held by his estate, whose trustees are Gordy Kanofsky and son Ray Neilsen. 25 million shares will eventually be distributed to his Foundation, with the remaining shares going to Ray Neilsen. The companyexpects it to take at least 4–5 years to transfer the shares to the Foundation, and potentially 8–9 years before the Foundation would face 20% ownership regulations. The estate has noplans to sell shares in the near or intermediate term, and eventually The NeilsenFoundation is expected to retain its holding in ASCA in the longer term.
Upcoming Events
On July 25, 2007, 2Q07 earnings release is expected.
Individual Analyst Opinions
POSITIVE RATINGS
Coker & Palmer – Buy ($38 – target price): 05/30/07– The firm continues to maintain a Buy rating with a target price of $38. INVESTMENT SUMMARY: The firm has confidence in ASCA’s management team for maintaining a stable revenue stream, coupled with cost cutting strategies in the system and thecompany’s ability to generate attractive returns on additional capital employment.
Morgan Joseph – Buy ($37 – target price): 05/02/07– The firm reiterates a Buy rating, with a price target of $37. INVESTMENT SUMMARY: The firm believes that ASCA has a solid financial position. The firm views the success of Black Hawk as a positive catalyst for the scalability of the ASCA business model. Further, the firm expects solid improvement at the East Chicago property. The firm remains positive as the company’s loss of revenue was offset by promotional expenditures and a benevolent cost environment.
Jefferies – Buy ($36 – target price): 05/02/07 –The firmmaintains a Buy rating along with the target price of $36. INVESTMENT SUMMARY: Thefirm remains optimistic about the stocks long-term upside potential, attributable to the growth possibilities from the expansion projects, addition to the recent East Chicago acquisition,management's call to aggressively pursue acquisition opportunities and increasing profitability; and the high quality of the company's management and gaming facilities.
KeyBanc – Buy (2): ($37 – target price):06/04/07– The firm maintainsa Buy(2) rating and a target price of $37. INVESTMENT SUMMARY: The firm remains impressed with the company’s strong operating results, as ASCA is considered to be lessleveraged than its peers, and that it is one of the few companies in the gaming space that pays a dividend. The firm believes that amidst the aggressive competition and difficult comparisons, management’s strategy shift from market share dominance to profitability maximization has started to give good results.
Wachovia – Outperform ($35–$37 – target price): 05/30/07– The firm continues to maintain an Outperform rating with an average target price of $36.50. INVESTMENT SUMMARY: The firm is impressed by the long-term outlook for ASCA, as it believes that the company can continue on its recent path, with margin improvement throughout the portfolio. It also believes that ASCA offers growth at a reasonable valuation.
NEUTRAL RATINGS
Brean Murray – Hold: 05/02/07 – The firmcontinues to rate a Hold rating on the stock. The firm expects that the valuation limits upside to the stock. INVESTMENT SUMMARY: The firm believes that the proposed acquisition and capital expansion projects diversify the company’s cash flow and would provide longer-term growth to the company. However, the firm expects better entry points for the stock.
Sterne, Agee & Leach – Hold ($32- target price): 05/02/07– The firm maintains a Hold rating, with a target price of$32. INVESTMENT SUMMARY: The firm believes the company has distinguished itself as a first class operator with its market leading facilities. Further, the firm believes that the impact of its strategic shift from market share to profitability has been intense. However, the firm remains concerned about competition in St. Louis and Kansas City.