ASCA A SPAC I Acquisition Corporation

Investors willing to gamble that the U.S. isn't heading for another recession could get a big payoff from Ameristar Casinos, Inc. (ASCA) if they're right.

The company has delivered three consecutive positive earnings surprises and has seen earnings estimates soar this year, but the stock, along with the overall market, has taken it on the chin since late July over recession fears in the U.S.

Shares now trade at just 7.9x 12-month forward earnings and sport a PEG ratio of 0.5. This, along with a 2.3% dividend yield, could provide some tremendous upside if the economy doesn't turn south.

Company Description

Ameristar operates 8 casinos in Missouri, Iowa, Colorado, Mississippi, Indiana and Nevada. The company was founded in 1954 and is headquartered in Las Vegas, Nevada. It has a market cap of $595 million.

Second Quarter Results

Ameristar reported better than expected results for the second quarter of 2011. Net revenues climbed 4% to $305.094 million, ahead of the Zacks Consensus Estimate of $302.0 million.

Five of the company's properties experienced year-over-year revenue growth, with its East Chicago and Council Bluffs locations delivering the strongest growth at 10% and 8%, respectively.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 18% as the company leveraged its fixed costs.

Adjusted earnings per share came in at 50 cents, beating the Zacks Consensus Estimate of 47 cents. It was a whopping 285% increase over the same quarter in 2010, due in part to a much lower share count.

Outlook

Analysts revised their earnings estimates significantly higher for Ameristar following strong Q2 results, sending the stock to a Zacks #1 Rank (Strong Buy) stock. Consensus estimates have been trending higher over the last several months as the company has delivered three consecutive positive earnings surprises:

Analysts are forecasting strong growth to continue for Ameristar over the next two years due in part to an improving regional gaming environment. The Zacks Consensus Estimate for 2011 is $1.94, representing 166% growth over 2010 EPS. The 2012 consensus estimate is currently $2.35, corresponding with 21% EPS growth.

Dividend

In addition to strong earnings growth, Ameristar offers investors a stable dividend that yields 2.3%. The company has paid the same 10.5 cent per share quarterly dividend since the beginning of 2008.

If earnings growth accelerates at the pace it's expected to, then a dividend hike could be on the horizon soon.

Valuation

Shares of Ameristar have taken a beating along with the overall market since late July. If another recession isn't right around the corner, however, then Ameristar looks like a great value.

The stock trades at just 7.9x 12-month forward earnings, well below the industry average of 19.0x and a significant discount to its 10-year median of 14.8x.

Its PEG ratio is only 0.5 based on a 5-year EPS growth rate of 16.5%.

The Bottom Line

With rising earnings estimates, strong growth prospects and a 2.3% dividend yield, Ameristar looks very attractive at just 7.9x forward earnings. If the U.S. doesn't slip into another recession anytime soon, then this casino stock could pay off big.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

 
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