SEARCH NEWS:

 

Financial Expert: Four Small Casino Stocks Worth Betting On

"You bet.

"But in the case of smaller casino companies, they might be making a mistake. Their shares are still a lot cheaper than their big brothers' -- or much of the rest of the market for that matter. And that valuation gap may close to some degree. Plus, several have promising plans to expand and cut costs. Judging by their earnings-estimate revisions, cheaper valuations and game plans, some of the better examples are: Aztar (AZR), Boyd Gaming (BYD), Argosy Gaming (AGY) and Ameristar Casinos (ASCA).

"…Demographics look good. It's those baby boomers again.

"`Most casino revenue is made off of slot machines,' explains Kent Gasaway, a portfolio manager at Buffalo Small Cap Fund (BUFSX), which holds shares in Argosy and Ameristar. `People who play slots are in that age group, and that age group is growing three times faster than the rest of the population. They have more discretionary income and casinos are getting their share'

"…More casino-friendly areas may be on the way. State budgets are hurting, and governors and legislatures may decide that more casinos would help, notes Gasaway.

"…The financials are relatively clean. Thanks to strict regulatory oversight and the simplicity of casinos (it's basically a cash business), investors can be fairly sure reported numbers are legit.

"…And compared to the wild days of expansion a decade ago when casinos took on a lot of debt to build out, they now have their houses in order.

"..To be sure, even the smaller, cheaper casino stocks are due for a breather here given their enormous runs recently. But despite the gains, relative valuations suggest further upside.

"…Large-cap casino operators like MGM Mirage (MGG) and Park Place Entertainment (PPE) look fairly pricey, with an average P/E of nearly 23. But smaller cap casino companies trade at a much lower 16 times forward earnings.

"… Small-cap casino stocks have about the same net profit margins as the S&P 500 -- or 7% to 8%. Yet they trade at a big discount, or 16 times forward earnings, compared to 22 times for the S&P 500.

"…Historically, investors justified the difference in part because bigger casino companies could borrow more cheaply. But that's changed. The smaller upstarts like Aztar have established a reputation for good management. And they've cleaned up their balance sheets.

"Next, as smaller players in less-developed regional markets, the little casino companies have more room to expand and build off a smaller base.

"…To be sure, no one thinks these small-cap casinos will ever trade at the same valuation levels as the big ones. But the gap should close to some degree. Here's a closer look at four players…"

< Gaming News