1998 Stocks for Mom
May 07, 1998

To Mom from Paul
by Paul Larson ([email protected])

Ameristar Casinos
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASCA)") else Response.Write("(Nasdaq: ASCA)") end if %>
3773 Howard Hughes Parkway, Ste. 490 South
Las Vegas, NV 89109
http://www.ameristars.com
$5 1/4 as of May 5, 1998

It sure is going to be tough to top what I gave you last year for Mother's Day, Ma. Your Anchor Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %> stock has had an outstanding, albeit volatile, run over the past 12 months. Nevertheless, I think I have a stock that stands a good chance of also hitting the jackpot going forward.

The company? None other than the world-famous Ameristar Casinos. I say "world-famous" with tongue-in-cheek because the company has an extremely small following on Wall Street, which is one of the reasons the stock looks like a diamond in the rough to your Foolish son. Ignored and disrespected are both adjectives that adequately describe the company. However, I can think of a few other more positive adjectives that describe the company's finances.

At a recent price of $5 1/8, the company trades at roughly 10 times trailing earnings. Seeing as how the average company in the S&P 500 trades at nearly 30 times earnings, there is clearly upside potential for the company to trade at a higher multiple. Ameristar is not just an earnings story, however.

The company's cash flow multiple -- the most common valuation metric used in the gaming industry -- is also extremely attractive. In 1997 the company had EBITDA (earnings before interest, taxes, depreciation and amortization) of $45 million. Divide the enterprise value, or "buyout value" (market capitalization plus debt minus cash), by the EBITDA and you get a multiple of roughly 6.3 times trailing cash flow, well below the industry average of roughly 8.5 times. Assume the company trades at an average industry multiple and you are looking at a $10 stock, nearly double today's price.

While all this is nice and dandy, what we should really be excited about is the growth the company should be posting later this year. There is growth on a unit basis because this past February the company opened a brand new casino in Las Vegas named The Reserve. The Reserve is done in an African safari theme and caters largely to the "locals market" in the greater Las Vegas area. So far the reviews of the new casino have been largely positive. While the financial results from this particular unit have not been released as of this writing, the company did announce its intention to go forward with an expansion of the resort already -- certainly a good sign.

There is potential for some internal growth, also. The company's other resorts in Jackpot, Nevada; Council Bluffs, Iowa; and Vicksburg, Mississippi are all stable performers and should continue to generate cash at comparable rates to past years. Ameristar's Vicksburg unit will be opening up new hotel rooms in the near future that should help propel results that much higher at that particular unit. The Council Bluffs expansion was just announced and should be completed sometime in 1999, again increasing the property's attractiveness and its results.

The bottom line is you have a company with a portfolio of three very stable properties that generate significant cash flow and earnings. The kicker is the company's new casino in The Reserve and its incremental cash flow in 1998 and, assuming all goes well, its significant earnings contribution in 1999 and beyond. All this and the company still trades at a bargain-basement price that any value-oriented shopper could love. And knowing how much you love a good value, Mom, this stock is for you.

Next: TMF Yorick gives NorthStar Capital

* A Stock for Mom represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.