Online Casino BTDino

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Tuesday, October 25, 2005

American casinos

Here's an example. A little more than two years ago in March 2003, I did a write-up on Ameristar Casinos (Nasdaq: ASCA) -- a top-notch riverboat casino operator with rapidly growing market share and arguably the top property in every market in which it competes -- and recommended the stock at just under $11 per share.

At the time, the company carried an enterprise value at about 5 times to 5.2 times the company's estimate of $190 million to $200 million in 2003 EBITDA, a valuation that is on par with the weakest players in the industry. As a premium player, I felt the company was worth at least 6 times EBITDA, if not closer to what premium players such as rival Harrah's Entertainment (NYSE: HET) should have reasonably fetched at the time at 7 times or 8 times EBITDA. I felt particularly strong about this, as at the time Ameristar held its market position while competing against Harrah's in each of its four riverboat markets in Missouri, Mississippi, and Iowa.

So there was plenty of headroom here. At 6 times the low-end estimate at $190 million in 2003 EBITDA, the stock would be worth $16.50. At 7 times, the stock would be worth $23.75, and at 8 times EBITDA, the stock would be worth $31 per share.

By April 8, 2004, the stock had hit $37.75 for a clean triple-plus, yet the company was still trading at just more than 6 times 2004 EBITDA, a clear hold at the very low end of my estimate for fair value. But by July 27, the stock had fallen back to $30.45, before dropping 16% to $25.65 the next day following the company's second-quarter earnings report.

But here's the thing: The business was still strong, the prospects were bright, and now the company was trading at a measly 5.5 times to 5.8 times 2004 EBITDA. At this point, the stock was a clear buy.

Ameristar continued to perform as a business, and casino stocks in general had gained favor on Wall Street. And on Feb. 4, the stock closed at $49.55 following the company's fourth-quarter earnings report, almost a double from its panic price just six months earlier. The stock is now trading at around $55 as of today.

The point here is that it would have been way too easy for an investor to panic sell once the stock fell from $37.75 to $25.65 in a span of less than four months. It also would have been way too easy to curse yourself for not selling at $37.75 while you were 250% ahead. But the enterprising investor armed with MCU Tip No. 1 -- valuation gauges -- can see the value in holding at $37.75 when the stock is reasonably valued or better, and can get greedy and push his chips in when the company is dirt cheap at $25.65 and 5.5 times to 5.8 times EBITDA.

The ability to do so will reward an investor handsomely over the long run.

MCU Tip No. 14: Beating strong foes wins much respect and little money; beating weak foes wins little respect and much money.
The lesson: Investing is about what makes the money in the long run.

Remember: Investors get paid for making correct decisions. There is no bonus for attacking complex companies, or making tough choices. Often times, you'll find that the best investment decisions you make will be both simple and obvious.