Isle of Capri - Down on Its Luck?

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Isle of Capri Casinos (NASDAQ: ISLE) will report 2013 Q2 earnings before the bell on Nov. 29. The Missouri based company owns and operates 15 casinos with an additional one under development in western Pennsylvania. The company’s Lady Luck and Isle branded casinos are located in Colorado, Mississippi, Louisiana, Iowa, Missouri, and Florida.

At their last earnings report in August the company disappointed with earnings down from $0.38 EPS in 2012 Q4 to $0.12 EPS for Q1 2013. That was partly due to spending on the opening of their new Isle casino at Cape Girardeau, Missouri. Revenues actually improved from $228 million to $236 million from Q1 2012 to Q1 2013. Rather than an earnings preview a Strength, Weakness, Opportunity and Threat fundamental analysis is more in order here since this name is thinly traded and the share price can be volatile.

Strengths

  • Regarding the Isle Cape Giradeau opening on Oct. 31, two months ahead of schedule, it went well with 3600 customers in the first 6 hours. This casino is the last casino to be granted a Missouri gaming license in the foreseeable future.
  • The casino in western Pennsylvania is to be associated with the Nemacolin Woodlands Resort, a Forbes Five-Star and AAA Five-Diamond property of 2000 acres, with full support from the resorts’ owners and will cost $50 million.
  • The company’s net leverage has decreased by more than 2.5x turns in the last five years with anticipated continued deleveraging since the Cape Giradeau opening this month. And according to their September Analyst Presentation Isle of Capri has $277 million in liquidity to fund their pipeline.
  • The company operates their Lady Luck casinos in smaller markets with a local customer base much like competitor Harrah’s. The Isle properties are larger with a more regional base and higher end amenities. This two prong strategy diversifies the company strategically and geographically.
  • Analyst opinion is generally positive with only upgrades since 2009, the most recent being an upgrade by FBR Capital in February from Market Perform to Outperform.
  • Standard & Poor’s raised Isle of Capri’s debt rating to B in October.

Weaknesses

  • The company stated in their last 10-K that they do not plan to issue dividends in the foreseeable future.
  • Competition is fierce in this space from both larger competitors like Harrah’s, owned by Caesars Entertainment Corporation (NASDAQ: CZR) with a casino located within an hour and a half drive from the new Cape Girardeau location and Penn National Gaming (NASDAQ: PENN) for the new Nemacolin casino in Pennsylvania as well as other locations. Additionally, Native American casinos are competing in these local markets with a new one opened near the Isle of Capri Pompano, FL property. Lake Charles, LA and Natchez, MS are also expected to have competing properties in the near future.
  • In their 10-K the company also highlighted risk from flooding to their Mississippi riverfront properties. Five of the Louisiana, Iowa and Mississippi casinos were closed for weeks and months in FY 2012. In addition their Colorado casino has occasionally had limited access due to blizzards and other weather related events.
  • As reported in that same 10-K the company has a “significant amount of indebtedness” with $1.2 billion outstanding.
  • Corporate governance risk is low in Audit and Compensation, but High for shareholder rights and the Board. Why? Because three members of the founding Goldstein family, Robert, Jeffrey and Richard are on the Board of Directors and along with other Goldstein family trusts control 42.1% of the common stock. As they state in the 10-K the Goldsteins have, ”significant control over voting and the board.”
  • The stock as mentioned before is in the gaming space which has been very volatile with Isle of Capri’s share price moving from $3.90 last December to a high of $7.92 on Sept. 19 and is currently trading at $5.45 with a forward P/E of 7.57.

Opportunities

  • One concept that the company has successfully implemented are their farm to table restaurant buffets, Farmers Pick Buffet, locally sourcing the menu items. The company is planning to eventually introduce it to all its properties.
  • The company has a strong customer service program with their “See, Say, Smile” initiative which has offered bonuses of over $11 million to employees for exceptional customer service. The company also conducts extensive surveys of customers and their gaming habits with the goal of increasing satisfaction.
  • Isle of Capri still owns additional property available for future development, in particular, mentioned on the 10-K were approximately 100 acres in Coahoma County, Mississippi.
  • Isle is almost finished the process of refurbishing and rebranding the older properties to attain a standard of amenities across both Isle and Lady Luck properties.

Threats

  • Fluctuations in operating income from continuing operations are to be expected. This is true of most gaming stocks, especially the smaller cap names like Isle of Capri.
  • While workers may be garnering those bonuses there is a groundswell in the casino space for union organization.
  • Slot machine manufacturers have been pressing casinos to lease instead of buying outright. Leasing is much more expensive than purchase and Isle of Capri gets a major part of their gaming revenue from slots.
  • The company owns a large portion of the land under the casinos and hotels but also leases an almost equivalent amount with possible, if not likely, raises of rent from the various municipalities and landowners it rents from.
  • Lastly, increases in expenses are to be expected including interest expense, food and beverage costs, and local and state tax rates. In FY 2012 gaming tax rates rose 3.6% and interest expense rose 21.9%.

Will Lady Luck Smile on Isle?

That’s the big question. With consumer confidence on the upswing and Isle of Capri having already taken charges on the Cape Girardeau opening, the earnings may be good. Going forward past earnings it is competing against the considerably larger Penn with a $3.67 billion market cap and a P/E of 21.56 and its 29 locations in all the same states as Isle of Capri and more.

Although Caesars has a negative EPS of $9.97, it is still quite competitive in the same space as Isle with its own riverboat casinos as well as regular casinos and a much larger market cap at $745.61 million than Isle of Capri’s $211.89 million. Also, Caesar’s has international exposure and Isle of Capri is decidedly domestic.

Isle seems to be doing the right things and has most of the same risks that any gaming company has in this environment. The two new casinos look promising but in my book Isle of Capri is still a dice roll. It could go either way.

 


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