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Susan Lin

Ameristar Casinos (NASDAQ:ASCA) runs eight casino resorts in the Midwestern U.S. Unlike other casino operators such as Wynn Resorts (WYNN) or Las Vegas Sands (LVS) which attract higher-end tourists, Ameristar's main customers are local residents and regional, in-state tourists.^[1] Customers come to Ameristar's casinos to play Vegas-style, low limit slots and a range of table games, including blackjack, craps, roulette and poker. The vast majority of Ameristar's revenues come from slots, which in 2007 accounted for 75% of total revenue, while table games only accounted for 9%. ^[2]

Ameristar's growth strategy has been driven by acquisitions. In September 2007, for example, Ameristar acquired Resorts East Chicago, which is located in northwest Indiana and serves the Chicago area, the third largest commercial gaming market in the U.S at $2.3B in 2007.^[3]

Business Financials

Ameristar's revenues by division (2005 - 2007)^[4]

Ameristar's revenues by casino (2007)^[5]

Ameristar Casinos owns and operates eight casino resorts in the Midwest region of the U.S. These resorts are located in St. Charles (Missouri), Kansas City (Kansas), Council Bluffs (Iowa), East Chicago (Indiana), Vicksburg (Mississippi), Black Hawk (Colorado) and Jackpot (Nevada). ^[6]

As stated above, the majority (75% in 2007)^[7] of Ameristar's revenues come from slot play in its casinos. Table games, including blackjack, craps, roulette and poker, make up only 9% of total revenue. Additional revenue is earned from food and beverage sales (from steakhouses, buffets and 24-hour casual dining restaurants), hotel room fees and other fees which account for 11%, 2.4% and 2.3% of total revenues respectively. The gaming revenues are derived from a broad base of customers, and most properties do not depend upon high-stakes players. ^[8] As can be seen from the graph below, this breakdown of revenues across customer activities has not changed much over the past three years.

Increased expenses from discontinued expansion projects, pre-opening expenses and the costs of acquiring Resorts East Chicago have hurt operating margins in the last four years.^[9]

From 2003 to 2007, Ameristar's net revenues grew at an average annual rate of 10.6%. Net revenues in 2007 increased $80.2 million (8.0%) over 2006. This increase was mainly due to the acquisition of Resorts East Chicago in September 2007, which brought in an addtional $73.6 million in net revenues. Additionally, the Black Hawk and Jackpot properties increased net revenues by 18.7% and 6.6%, respectively, due to expansions and a re-branding effort in Black Hawk. This growth, however, was partially off-set by decreases in net revenue in the Vicksburg, Council Bluffs and Kansas City properties.^[10]

Operating income likewise grew from 2003 to 2007, on an average of 6% per year. In 2007, operating income increased $2.2 million (1.3%) over 2006, mainly due to growth in Ameristar's Black Hawk resort as well as the acquisition of Resort East Chicago’s, which contributed $5.4 million. However, operating income has not been increasing as fast as revenue growth in recent years, due to increasing expenditures and a subsequent decreasing operating margin. This is mainly due to increased expenses from discontinued expansion projects, pre-opening expenses and the costs of acquiring and rebranding Resorts East Chicago. Depreciation expenses have also risen as a result of ongoing major renovation and expansion projects at St. Charles, Black Hawk and Vicksburg.

St Charles is currently Ameristar's most valuable casino resort, accounting for 26% of total revenue in 2007. Kansas City and Council Bluffs also contribute significantly to Ameristar's revenue, accounting for 23% and 17% of total revenue respectively. Blackhawk however, is Ameristar's fastest growing casino, growing an average of 19% in total revenues annually from 2005 to 2007 due to a re-branding and renovation project. Blackhawk, along with the newly acquired East Chicago resort is thus accounting for much of Ameristar's recent growth.^[11]

Trends and Forces

Ameristar Casinos' profits are vulnerable to changes in gaming regulation

The gaming industry as a whole is highly regulated and subject to state and local legislation, and is especially vulnerable to changes in gaming taxes and fees. State and local governments may attempt to reduce budget deficits through increases in gaming taxes, especially during economic downturns, and Ameristar operates casinos in eight different U.S. states. For example, Nevada (home to Ameristar's Jackpot casino) is considering increasing its gaming taxes by 3% to raise money for public school spending.^[12]

Recent smoking bans across states have also affected casino revenues. Gross revenues in Illinois casinos decreased 14% in 2008 after smoking ban legislation was passed, and attendance has decreased by almost 6%.^[13] In January 2008, Colorado (home to Ameristar's Black Hawk casino, which generated 26% of the company's 2007 revenue) imposed a statewide smoking ban that includes casino floors.

Ameristar's revenues are affected by general economic conditions and are vulnerable to downturns

The gaming industry as a whole is vulnerable to economic conditions, as it decreases consumers' disposable income, leading to both fewer visitors and less spending per visitor. Indeed, the current US economic slow down, caused by the 2007 subprime mortgage crisis has already begun to affect the comapny. The Vicksburg and Council Bluffs markets have taken 4.3% and 1.5% hits to total revenue, respectively, when compared to 2006, and the St. Louis, Kansas City and Chicagoland markets saw slow revenue growth.^[14] Ameristar's resorts cater to local, middle income customers whose discretionary incomes are sensitive, and adverse economic conditions take a toll on their entertainment budgets. For example, the increase in gasoline prices could negatively effect the company as most of Ameristar's customers drive to their casinos.^[15] The general strategy for casinos in such economic slowdowns is to offer discounts and packages^[16] to attract more customers, which does drive revenues but has an adverse effect on the company's operating margin.

Ameristar Casinos is vulnerable to increasing interest rates

Although current Interest Rates are low, the Federal Reserve is expected to increase rates soon to counter-act the weak US dollar.^[17] As of 2007, Ameristar has about $1.6 billion in outstanding debt and its properties are highly leveraged.^[18] This large debt is mainly due to additional borrowings to fund the acquisition of Resorts East Chicago in 2007. With the planned expansion projects, total debt will further increase, and may exceed the maximum permitted senior leverage ratio in 2008.^[19]. In 2007, the company paid $77.6 million in interest costs ^[20], almost 44% of operating income. An increase of one percentage point in the average interest rate applicable would increase the company's annual interest cost by around $16.4 million.^[21] Thus, a rise in interest rates would significantly impact Ameristar's net income and available cash. This would also limit the company's ability to finance its plan of expanding its current properties.^[22]

Ameristar Casinos' revenues are affected by extreme weather conditions

As all of Ameristar's properties are located in the Midwest, they are vulnerable to adverse weather conditions such as flooding, heavy snowfall and other natural disasters. These extreme weather conditions damage casino properties, deter customers from traveling and makes it difficult for them to visit the casinos. For example, the Vicksburg property in Mississippi suffered damage and was closed for months in 2005 as a result of Hurricane Katrina.^[23] The Midwest floodings in 2008 has already affected attendance at casinos in St. Louis, Illinois and Iowa, and will also affect the attendance and revenue of Ameristar's casinos.^[24]

Competition

The gaming industry is highly competitive and Ameristar faces competition from both regional casinos and national chains. ^[25] Ameristar, however, is able to distinguish itself by providing Vegas-style resort casinos in smaller, Midwestern markets, where many larger competitors such as Wynn Resorts don't have properties. It attracts customers by providing low-limit slots (such as penny and nickel slots, which are popular among gamers), a variety of table games, good gaming facilities, multiple dining options and well known entertainers in its resorts.

Ameristar's main national competitors include:

Harrah's Entertainment (HET)

Harrah's Entertainment is the world's largest gaming company^[26] and operates 50 properties globally, including in the Midwestern markets, such as Iowa and Indiana. The majority of its revenue (55%)^[27] however, comes from its properties in Las Vegas and Atlantic City where Ameristar does not compete.

Boyd Gaming (BYD)

Boyd owns and operates 16 casinos in Nevada, Mississippi, Illinois, Louisiana, Indiana and Florida. Unlike MGM Mirage or Wynn Resorts, the company typically caters to the middle-income customer. However, like MGM Mirgae and Harrah's, Boyd also mainly focuses on its Las Vegas properties, as only 44%^[28] of its revenue is derived from operartions in the Midwestern region.

Penn National Gaming (PENN)

Penn National Gaming owns 12 casinos, 7 racetracks, and off-track betting facilities in 14 states and in Ontario, Canada. Its casinos and racetracks generate revenues primarily through house winnings in table games, slot machines, and wagers on races.

MGM MIRAGE (MGM)

MGM Mirage runs 23 hotels and casinos globally, most notably in Las Vegas and Macau, but also in the Midwest.^[29]The company generates slightly less than half of its income from casino activities while lodging, dining, entertainment and retail services comrpise most of the rest. MGM also hosts major conventions and operates gambling facilities for third parties.

Market Share

Regionally, Ameristar is a leader in most of the markets it's located in, capturing 46% of the Vicksburg market, 37% of the Council Bluffs market and 35% of the Kansas City market as of 2007. Market share for each individual casino resort below is based on their net revenue as a percentage of the regional markets overall gaming revenue in 2007. ^[30]

Nationally however, Ameristar Casinos (which in 2007 has a total revenue of $1.08 billion) is still a small player. The company captures about 3.3% of the total domestic US casino market, which is now worth $32.42 billion in total revenue.^[31] Market share for each company below is based on their net revenue as a percentage of the total US domestic gaming revenue in 2007.

U.S. Casinos Market: Marketshare (2007)^[32]

References

1. ↑ ASCA 2007 10K, Item 1: Business, Page 10
2. ↑ ASCA 2007 10K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 46
3. ↑ ASCA 2007 10K, Item 7: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 43
4. ↑ ASCA 2007 10K, Item 6: Selected Financial Data, Page 40
5. ↑ ASCA 2007 10K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 45
6. ↑ ASCA 2007 10K, Item 1: Business, Page 3
7. ↑ ASCA 2007 10K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 46
8. ↑ ASCA 2007 10K, Item 1: Business, Page 3
9. ↑ ASCA 2007 10K, Item 6: Selected Financial Data, Page 40
10. ↑ ASCA 2007 10K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 46
11. ↑ ASCA 2007 10K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 45
12. ↑ KVBC, "Education Funding & Nevada's Budget Crisis", July 29, 1008
13. ↑ The Detroit News, "Illinois smoking ban sends casino revenues down", July 2, 2008
14. ↑ ASCA 2007 10K, Item 7: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 43
15. ↑ South Coast Today, "Gambling revenue declines across U.S.", July 27, 2008
16. ↑ Forbes, "Casino shares sink on economic woes", July 1, 2008
17. ↑ USA Today, "Dollar's decline could be close to end after Europe raises rate", July 9, 2008
18. ↑ ASCA 2007 10K, Item 1A: Risk Factors, Page 33
19. ↑ ASCA 2007 10K, Item 1A: Risk Factors, Page 33
20. ↑ ASCA 2007 10K, Item 7: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 47
21. ↑ ASCA 2007 10K, Item 1A: Risk Factors, Page 34
22. ↑ ASCA 2007 10K, Item 7: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 52
23. ↑ ASCA 2007 10K, Item 7: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 48
24. ↑ South Coast Today, "Gambling revenue declines across U.S.", July 27, 2008
25. ↑ ASCA 2007 10K, Item 1A: Risk Factors, Page 31
26. ↑ Fortune Magazine, The 35 Largest Private U.S. Companies: Harrah's Entertainment
27. ↑ HET 2006 10K, Item 1: Business, Page 4
28. ↑ BYD 2006 10K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, Page 19
29. ↑ Google Finance: MGM Mirage
30. ↑ ASCA 2007 10K, Item 1: Business, Page 10
31. ↑ American Gaming Association: New AGA survey shows U.S. casino industry characterizd by significant growth and high approval ratings, May 8, 2007
32. ↑ American Gaming Association: New AGA survey shows U.S. casino industry characterizd by significant growth and high approval ratings, May 8, 2007