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Casino Stocks: The One Sin Stock You Should Be Betting On
by David Fessler, Advisory Panelist
Thursday, May 7, 2009: Issue #992
Casino stocks have been more than down on their luck lately. In fact, they’ve been on the ropes more than one of their prizefighting boxers. And it’s no wonder.
The recession has hit consumers hard. And many have cut their spending, doling out their dollars for the necessities: food, shelter, clothing and gasoline – but little else.
To say business has been bad doesn’t really capture the scope of the damage.
- It’s easy to see the effects on casinos – the top dogs in most markets – and we don’t always notice the impact to the rest of the food chain.
- Restaurants have plenty of empty tables these days. Those little beepers you get while waiting in line are just sitting around collecting dust.
- Malls resemble ghost towns; most of the visitors are store employees themselves. Many of the weekend customers are teenagers, with little more to spend than time.
That’s why it’s so surprising to find a company that’s doing well, much less a casino.
Amidst all of this economic devastation there are companies who have been holding their own and putting up impressive earnings figures. We’ve found one casino stock in particular that has a unique business model of drive-to locations that’s been succeeding where Vegas hasn’t.
Casino Stocks Drop As The Travel Industry Suffers
The travel industry is suffering right now. And while it’s put a bite on tourism, it’s hurt most casinos much worse.
And no place got hit harder than Las Vegas. “Sin city” experienced a 10% drop in visitors in January and February. Unfortunately, that’s the good news. Gaming revenues were a paltry $937 million, down almost 20%.
More visitors equal more spending in the gambling capital of the world.
And when you consider that over 37 million visitors go to Vegas every year, a 10% drop equates to 3.7 million people not adding tens of millions to the economy – or a casino’s bottom line.
As the infamous strip has grown, mega-casinos have popped up as well with each casino supporting thousands of workers and capable of adding billions to their parent company’s bottom line. A 20% drop in revenue for many casinos means that they aren’t able to pay their fixed expenses.
That sobering statistic has translated into a huge problem for many of the gaming companies, who now find themselves scrambling to stay solvent. They’ve laid off thousands of employees and slashed expenses in an effort to stem the red ink.
But it hasn’t been enough: Las Vegas-based MGM Mirage, Riviera Holdings and Station Casinos are all in discussions with their lenders and bondholders. The topic? Missed debt payments.
Station Casinos missed a payment last week, and Riviera missed a $4 million interest payment on its $25 million line of credit on March 30.
Casino Stocks – It’s All About Location, Location, Location…
At first glance, you might think all gaming companies and casino stocks are in similar straits. But they’re not. An important difference sets at least one of them apart: casino location.
Not too surprisingly, with fewer people willing to shell out money for airline tickets, a greater percentage of Vegas visitors are coming from drive markets like Southern California.
It’s not that people don’t want to gamble – they just don’t want to shell out hundreds or thousands of dollars for plane tickets to get there.
So it stands to reason that if we wanted to “invest in sin,” we should take a look at gaming operators who own casinos primarily served by drive markets, whether it be Las Vegas or elsewhere.
Ameristar Casinos, Inc. (Nasdaq: ASCA) isn’t the biggest casino operator, but it’s certainly one of the most profitable. None of its eight casinos are in Las Vegas, and all of them cater to local, drive-to clientele.
- Cactus Pete’s and Horseshu are both located in the town of Jackpot, Nevada – a popular recreational vehicle destination in the northeastern part of the state. With a full hookup RV park right next to the casino, Cactus Pete’s – the largest gaming and entertainment destination in northeast Nevada – allows RV gamblers easy access to casino facilities.
- The Ameristar Casino Hotel in East Chicago, Indiana – one of the largest casinos in the Midwest – is a short drive for its Windy City clientele.
- The company recently completed a 130,000 sq. ft. addition to its casino in St. Charles, Missouri. With its seven restaurants, Resort Spa St. Charles is a short 20-minute drive from downtown St. Louis.
- The company’s Kansas City, Missouri 3.5-acre casino floor features more than 3,000 slots, 105 gaming tables, 12 restaurants, an 18-screen movie theater complex and a Kid’s Quest childcare facility. And it’s a mere five minutes from downtown.
- The Council Bluffs, Iowa crowd need only head down to the Platte River, where three full decks of gaming await on the largest riverboat casino in Iowa. Ameristar also owns a large land-based AAA 4-Diamond hotel adjacent to the riverboat.
- The company’s Casino Black Hawk is located about 70 miles from Golden, Colorado. A major regional gaming and entertainment destination, the Black Hawk complex, sports a 1,550-space parking garage, one of the largest in the area.
- The Casino Hotel Vicksburg, another riverboat casino located on the mighty Mississippi, is the largest dockside casino in the southwest part of Mississippi. Number one in its market for the past several years, this facility sports a colorful blues bar and a state-of-the-art gaming center.
Casino Stocks: Ameristar’s Business Model Is Working…
So how well is Ameristar’s “drive-to” business model working? Quite well, thank you. Last quarter, it achieved record earnings – chalking up $0.52 per share – compared to a net loss of $1.07 for the same quarter in 2008.
“Ameristar achieved record EPS in the first quarter,” said Gordon Kanofsky, Ameristar’s Chief Executive Officer and Vice Chairman. “This was largely because of our sustained emphasis on achieving operational and marketing efficiencies, particularly during the current recession.”
Even more impressive, the company achieved these results on revenues of $315 million, $10 million lower than the previous year.
To experience a decline of only 2.7% when the rest of the industry’s looking at 20% declines speaks to the validity and diversity of the company’s business model.
Since most of the casinos are located in travel destinations, hotel occupancies remain high, offsetting small declines in gaming revenues.
The company remains well capitalized, having recently amended its credit facility with its lender through 2012.
CEO Kanofsky commented on the company’s future outlook: “Despite expected continued difficult economic conditions in 2009, we believe Ameristar is well positioned to continue to drive year-over-year margin growth.
“We also believe that regulatory reform in three of our key markets – coupled with significant investments in two of those markets – should drive future revenue growth, enabling Ameristar to emerge from the recession stronger and more profitable.”
We wholeheartedly agree. If you’re looking at investing in sin through casino stocks, Ameristar Casinos sports some of the best odds outside of Las Vegas.
Good investing,
David Fessler
P.S. I highly encourage you to take advantage of The Oxford Club’s subscription offer if you haven’t already. New subscribers will get Alexander Green’s New York Times bestseller “The Gone Fishin’ Portfolio” for free.
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David Fessler is an Advisory Panelist for Investment U and The Oxford Club, one of the world’s most exclusive and prestigious networks of private investors.
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May 8th, 2009 at 8:50 am
The Platte River does not flow through the Omaha-Council Bluffs area, however, the Missouri River does.
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