(By Mani) Ameristar Casinos, Inc. (NASDASQ:ASCA) is a good investment in the casino space given its diversified group of attractive gaming assets with market-leading shares.
Las Vegas, Nevada-based, Ameristar Casinos is a diversified regional gaming operator which owns and operates eight properties in the United States. The company's facilities span seven different markets across six states and are primarily marketed using the "Ameristar Casino" brand.
Four of its seven properties are market share leaders, and the company has historically shown the ability to hold share when competitive conditions intensify and manage costs to mitigate declines in EBITDA.
The company also retains a number third position in competitive Chicago-land market despite a bridge closure that has affected traffic to that casino. Historically, market leaders hold share better than other competitors in a market when new gaming supply enters. Ameristar has been exposed to new competitive supply in several markets but has been able to maintain its market share and recover from the initial effects of the new supply.
"We view the market share leadership and geographic diversity as an important contributor to the stability to the company's earnings stream," RBC Capital Markets analyst John Kempf said in a client note.
In March, Ameristar acquired 100 percent of membership interests of Creative Casinos, and plans to build a $500 million casino resort in Lake Charles, which is expected to be opened in mid-2014.
"We believe the property Lake Charles can generate approximately $80 million of annualized EBITDA when fully ramped," Kempf noted.
Ameristar Casinos has one of the strongest EBITDA margins in the gaming industry despite its presence in relatively high-tax regional gaming markets. The company's ability to manage costs effectively has protected them during periods of economic weakness and intensifying competitive conditions.
"In our view, Ameristar is one of the best-run regional gaming operators. Despite expected modest revenue growth in the near-term, we believe Ameristar's property portfolio merits a higher multiple given its market share leadership and high margins," Kempf said.
Ameristar should realize a large flowthrough of its revenue gains to the bottom line. On a recent conference call, the company has stated that it believes it has made in excess of $60 million of permanent cost reductions over the past year.
The company has historically generated strong, free cash flow due to its relatively low cost of debt and maintenance capital expenditure requirements, thereby allowing it to fund new development projects, repay debt, pay dividends, and repurchase equity.
"Assuming $80 million of maintenance capital expenditure requirements, we estimate ASCA will generate free cash flow of $170 million in 2012 and $160 million in 2013," Kempf said.
Therefore, the company should be able to finance the bulk of its Lake Charles development with internally generated cash flow, allowing ASCA to keep its liquidity and borrowing capacity available to pursue other development and acquisition opportunities.
In addition to Lake Charles, the company is pursuing a gaming license in western Massachusetts and is expected to pursue accretive acquisitions to further grow the company and diversify.
"We view Ameristar as an attractively priced regional gaming operator, given its geographic diversification, market-leading casinos in important gaming markets, and promising development pipeline," the analyst added.