Agy - Zacks Investment Research



March 31, 2005

Ian Madsen , MBA, CFA, Editor

imadsen@

Marla Harkness, MBA, CFA, Senior Analyst

Assisted by: Aniruddha Ganguly

155 North Wacker Drive ( Chicago, IL 60606

|Argosy Gaming | |$45.92 |

| |(AGY-NYSE) | |

Note to Readers: This report contains substantially new material. Subsequent editions will have new or revised material highlighted.

Overview

Argosy Gaming, (AGY) owns and operates six casinos located in the central United States: Argosy Casino Lawrenceburg, Empress Casino Joliet, Alton Belle Casino, Argosy Casino Riverside, Argosy Casino Baton Rouge and Argosy Casino Sioux City. These casinos cater to local customers who generally live within an hour's drive. The Company continually upgrades its gaming products and continues to invest in cashless ticket-in, ticket-out (TITO) slot machines (which are more convenient to customers), and to increase operational efficiency. The Company is based in Alton, IL and employs over 5,700 people. Its website is and its fiscal year ends December 31.

AGY reported a strong 4Q and FY04. 4Q revenues increased 10.3% and EBITDA improved 8.5%. This was primarily driven by strong Riverside, Baton Rouge and Sioux City. Argosy Riverside, which had completed a $105 million renovation in December 2003, generated the biggest increases, with revenue and EBITDA surging 44.8% and 180.6%. Lawrenceburg posted relatively weaker results on difficult comparisons. Management is planning two major projects in the near term. Riverside in Kansas City is undergoing a $75 million expansion, including a new parking garage and 250-room hotel, which should help sustain the property’s momentum. The acquisition of the company by Penn National Gaming is expected to close in 2H05. Penn National Gaming has proposed to pay $47 per share as the acquisition price. Despite the company’s operating and financial performance, as well as a positive outlook on its properties, the next several quarters will be squarely centered on the timing of the acquisition and integration by Penn National gaming.

Analysts have identified the following issues as critical to evaluating the investment merits of AGY:

|Key Positive Arguments |Key Negative Arguments |

|Improvement in overall growth: Riverside Kansas City continues to perform well.|Increase in costs related to merger: EPS was negatively hampered by the |

|Good performance in Baton Rouge and Sioux City. |increase in costs related to merger. |

|Improvement in Operating profit: The old Riverside boat was moved to Iowa, |Concern on EBITDA growth: Disruptions from the construction of the $75 |

|which resulted in a 56% increase in operating profits. Lower depreciation and |million hotel and garage project in Kansas City can impact EBITDA growth |

|interest expenses also contributed. |negatively. |

|Long term growth: Future growth from capital projects in Kansas City and |Weak Lawrenceburg: Lawrenceburg posted weaker results on difficult |

|Lawrenceburg. |comparisons. Expansion plans have been put on hold owing to the Penn |

| |merger. |

|Solid EBITDA growth: Solid performance in the new Sioux City riverboat and |Increase in Competition: If gaming legislation passes in Ohio, |

|improved performance in Illinois. |Lawrenceburg will face potential competition. |

Sales

FY04 net revenues increased to $1 billion, up by $81.4 million year-over-year. This includes a $50.6 million increase in net revenues at the company’s Riverside property and a $26.1 million increase in net revenues at the company’s Lawrenceburg property. FY04 gaming revenues grew over 10% in 2004, primarily driven by the company’s new casino at its Riverside property, which had a positive impact on the Kansas City market. 4Q04 net revenues increased to $255.7 million up by $23.8 million year-over-year. Except for Lawrenceburg, all other properties recorded growth. Benefiting from the success of its new casino, Argosy Casino-Riverside’s revenue increased 44.8% year-over-year. Argosy Sioux City also recorded a strong quarterly performance with net revenues of $13.5 million, reflecting an increase of 29% year-over-year primarily due to its renovated boat and expanded gaming capacity.

According to the merger agreement with Penn National Gaming, AGY management agreed not to provide any guidance. One analyst (CIBC) forecasts moderate growth for the Lawrenceburg property in FY05 given that it has been operating near capacity for some time. For the Riverside property, the analyst forecasts modest revenue growth. For Baton Rouge, the analyst forecasts a slight decline in revenue for FY05. For Sioux City, the analyst forecasts double-digit gains in the 30% range for both revenue and EBITDA in FY05 due to the enlarged facility. Another analyst (Wells Fargo) opines that AGY should achieve growth in FY05 and FY06 from the potential tax repeal in Illinois (as its two Illinois facilities stand to gain) and from additional capital projects planned over the next two years in Kansas City and Lawrenceburg.

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Margins

AGY reported EBITDA of $62.5 million for the 4Q04, compared to $57.7 million for 4Q03. The company’s EBITDA margin for the quarter was 24.5% down from 24.9% year-over-year. At the property level, the EBITDA margin improved to 28.8%, up 100 bps year-over-year. AGY’s EBITDA margin before corporate expenses improved 70 bps. One analyst (KeyBank) opines that AGY was effective at controlling costs in 4Q04, both on an operational and a financial basis. The only exception was in corporate expense, which was substantially higher due to non-recurring merger related expenditures. On the operational side, gaming and admission tax expense was 96 bps better than expected. Casino expense was 36 bps better than estimated, largely due to AGY’s casino efficiency initiatives including the full rollout of Tito (Ticket-in, Ticket-out) machines.

One analyst (KeyBank) believes that the improving domestic economic environment and a likely reduction in Illinois gaming taxes will benefit the company’s business. Another analyst (Calyon) reduces their 2005 and 2006 EBITDA estimates due to higher corporate expense and less robust expectations for AGY’s Baton Rouge property. Their EBITDA estimates continue to reflect some disruption from the construction of a $75 million hotel and garage project at its Kansas City property. Management expects the new garage to open in August 2005 and the new hotel to open at the end of 2006. Another analyst (CIBC) views a prospective expansion of Lawrenceburg, which generates approximately 50% of the company’s property EBITDA, to be very positive. For the Riverside property, the analyst forecasts modest EBITDA growth.

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Earnings per Share

AGY reported 4Q04 EPS of $2.07 as compared to $1.76 from the prior year quarter. This result was positively impacted by a $3.2 million pre-tax gain on the sale of a former gaming vessel in Joliet and the $1 million Indiana income tax accrual. This result was negatively impacted by $26 million in pre-tax expenses related to the refinancing of the company’s 10 ¾% notes in February and $3.8 million in pre-tax merger-related costs. These four items together resulted in a net reduction of $0.50 of FY04 EPS.

4Q04 EPS was $0.63, $0.07 ahead of consensus. This was positively impacted by $0.03 from the favorable settlement with State of Indiana regarding deduction of tax payments but offset by $0.06 from the cost of proposed merger between Argosy and Penn National Gaming.

Most of the analysts are raising their EPS for FY05. Two analysts (Calyon, UBS) raised their EPS for FY06. One analyst (CL King) is increasing their FY05 estimates for AGY (as a stand alone company) by $0.09 to $2.91 as property enhancements continue to drive strong revenue, EBITDA and margin growth.

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Target Price/Valuation

Out of the nine analysts covering AGY in our Digest survey, 7 analysts gave a neutral rating, 1 analyst gave a negative rating, and 1 didn’t give any rating. None of the analysts came out with a positive rating.

Analysts covering AGY are projecting a target price of $47. One analyst (Deutsche Bank) is using 7x 2006 EBITDA estimate to calculate his target price. Another analyst (UBS) is taking PENN’s $47 take-out offer as the basis of his $47 calculation. One analyst (Jefferies) is raising his target price.

Long-Term Growth

Long-term growth rates for AGY range from 10% to 15%. Analysts believe AGY will focus on renovating and expanding its existing hotels and casinos over the next 18-24 months. This should result in its Lawrenceburg and Riverside hotels yielding 20%+ returns over the long term. Analysts feel the Company will also grow through acquisition. The Company has already acquired a potentially high growth asset in the likes of Raceway Park (Toledo, OH), which analysts believes would yield significant growth if Ohio approves slots at tracks. This acquisition would also help relieve some of the competitive pressures the Company faces in the state of Ohio. EPS growth is expected to be 20%+ in the next few years, and should remain high once hotel renovations/expansions are complete.

Individual Analyst Opinions

POSITIVE RATINGS

None.

NEUTRAL RATINGS

Calyon – Neutral ($47): Report Date 2/10/2005

The stock is rated Neutral with a $47 price target. The analyst raised their 2005 and 2006 EPS estimates despite their lower EBITDA estimates due to low depreciation and interest expenses in both years.

CL King – Neutral: Report Date 2/9/2005

The analyst rates the stock Neutral. The analyst increased their 2005 estimates for AGY as property enhancements continue to drive strong revenue, EBITDA and margin growth.

Deutsche Bank – Hold ($47): Report Date 2/9/2005

The analyst rates the stock Hold with a target price of $47. The analyst believes that the pending AGY and PENN merger is an outstanding transaction for both companies and both sets of shareholders. The analyst believes that PENN will be able to extract significant synergies and new growth opportunities as a result of this combined entity.

Jefferies – Hold ($47): Report Date 2/10/2005

The analyst maintains their Hold rating on AGY and changes their price target from a range of $44-$46 to $47 to reflect the acquisition price Penn National Gaming has proposed to pay for the company.

KeyBanc – Hold: Report Date 2/9/2005

The analyst maintains a Hold rating due to challenging market conditions in Illinois. The analyst continues to expect AGY to benefit from expansions at Riverside and Sioux City. The analyst expects that an improving economy and the completion of a slot machine upgrade rollout will aid results.

Merrill Lynch – Neutral: Report Date 2/9/2005

UBS – Neutral ($47): Report Date 3/14/2005

Wells Fargo – Hold: Report Date 2/9/2005

NEGATIVE RATINGS

Prudential – Underweight ($47): Report Date 2/9/2005

NOT RATED

CIBC – Report Date 2/9/2005

Morgan Stanley – Report Date 2/13/2005

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Research Digest

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