Rolling on the River: Argosy's Floating Casinos Beating Vegas Houses

The downbeat Mississippi River town of Alton, Ill., is a long way from the glitz of Las Vegas and Atlantic City. But Argosy Gaming(AGY Quote), an unheralded outfit with headquarters there, shows that you don't have to run with the likes of Steve Wynn to make a go of it in the casino business.

Argosy's specialty is riverboat casinos -- big, busy ones that churn out robust profits in the Midwest and South. Exhibit A: the company-owned Alton Belle, located a golf shot from Argosy headquarters. Last quarter, Argosy took nearly $10 million in profits out of the casino on an investment of $68 million, a nifty 15% payout. "If you annualize that out, you have one heck of a return," says Argosy Treasurer Dan Marshall. "If we wanted to go into Vegas and build, I don't think you'd see returns that significant."

Argosy's winning streak didn't stop on the Alton waterfront. Overall, the company had a torrid quarter, beating Wall Street estimates by 8 cents (46 cents per share vs. 38 cents projected) and keeping alive a streak that has placed it among five industry players with the fastest-growing profits over the last 12 months.

Its stock also has spurted, outdistancing many peers in the small-casino market as well as such heavies as MGM Grand(MGG Quote) and Park Place Entertainment(PPE Quote). Argosy shares jumped to a recent high of 17 7/16 from a 52-week low of 6 9/16 and were trading for less than 10 as recently as February. Argosy closed Tuesday at 16 5/8, up 3/8.

Outshining Las Vegas Argosy Gaming, its stock up 25% in the last six months, has shown the big gambling companies a thing or two about winning strategies. Here, AGY's shares are held up against the market performance the last six months of MGM Grand (MGG), Park Place Entertainment (PPE), Harrah's Entertainment (HET) and the Chicago Board Option Exchange's Gaming Index (GAX.)

Source: Baseline

The quarter ended March 31 was the strongest first quarter in company history. Net income reached $13.4 million, up 185% from $4.7 million a year earlier, excluding special items. Revenue jumped 28% from $129.1 million to $165.5 million.

Three years ago, Lady Luck had abandoned Argosy, which operates five riverboat casinos from Indiana to Louisiana. The company was laden with debt, its casinos needed freshening and interim management was in charge. But then the company hired a new CEO, James Perry, and things began to turn around.

"It's really a story about new management," says Kent Gasaway, portfolio manager at the Buffalo Funds Group, which holds more than 3% of Argosy's shares.

Under the 50-year-old Perry, a 25-year gaming and entertainment industry veteran, the company has worked down its debt and further reduced interest cost through restructuring. Generally, it put itself in a financial position to spruce up its properties. The Alton Belle, for instance, had a new $14 million landing facility that helped expand gambling on the boat.

Just as important, the company's marketing has come to life under Perry. Argosy started asking customers, most of them blue-collar folks who like to pull slots, all sorts of questions about what they wanted. And the company responded. More nickel slots? No problem. Want entertainment? No problem.

Argosy focused the effort on the Alton Belle and riverboats in the Kansas City area, Sioux City, Iowa, and Baton Rouge, La. As a result of the marketing push, earnings before interest, taxes, depreciation and amortization -- a key gauge of industry profitability -- in those casinos rose 70% to $58 million last year.

"It came down to needing somebody to learn who the customers were and how to treat them and keep them coming back," Gasaway says.

But some analysts don't think the market fully appreciates the company yet. At Tuesday's close, the shares traded at about 10 times projected 2000 earnings per share of $1.65, up from $1.44 but slightly below other small gaming stocks and less than half of the S&P 500's multiple of 26 times this year's anticipated earnings.

Merrill Lynch analyst David Anders rates the stock accumulate, in large measure because he expects no major new competition for the company in any of its markets soon. Anders' firm has not done any underwriting for Argosy.

One question that lingers is the future of the company's largest and most profitable operation, the 2,000-slot riverboat in Lawrenceburg, Ind., which is the dominant casino destination for the Cincinnati and Dayton markets. The company stands to bolster its fortunes if it can negotiate a favorable deal with Conseco(CNC Quote), the troubled financial services company, to acquire Conseco's 29% stake in the operation. Argosy, which holds 57.5% of the operation, has opened buyout talks with the insurer.

Brian Egger, analyst at Donaldson Lufkin & Jenrette, says that although Argosy's stock has enjoyed a good run, the opportunity to bag more profits at Lawrenceburg could drive it higher. Lawrenceburg also would benefit, he says, if Indiana legislators yield to industry pressure and allow dockside gaming, permitting Indiana boats to keep up with Illinois competitors. Under current law, access to riverboat casinos is limited because they are required to cruise.

Like other gaming operators, Argosy has benefited from the solid economy, which contributed to an 11% increase in gambling revenue in 1999. What happens when growth ultimately slows? The company will feel the pinch as consumers skip those trips to the slots. Still, Marshall likes his company's chances over those of the big operations in Las Vegas and Atlantic City.

"We're more recession-proof than the destination markets," he says. "The bulk of our customers live within 25 to 50 miles of our casinos. It's like golf -- you're going to stay in your neighborhood to play."