Caution Recommended When Investing in Isle of Capri Casinos

isle-of-capri-casinos Isle of Capri Casinos (NASDAQ:ISLE) has surprised industry watchers with its earnings for the last quarter. The company’s net earnings touched a whopping $25 million, a substantial 361% jump over earnings of the previous year when it generated a mere $3.1 million for the quarter.

The company’s revenues, however, dropped during the same period, by 1.6% to $265 million. Investors would definitely benefit from looking deeper into the performance of the company since its earnings have very clearly given mixed signals.

In fact, the most likely factors impacting the company’s performance were:

The Rain Gods Have Been Unkind

Texas and Louisiana have been experiencing quite a lot of rain of late and parts of these states have even been inundated. The Lake Charles casino has had a pretty dry spell, from the point of business, since the Houston area (just 2 hours away) has been badly affected by rain and Interstate 10 was also closed down for a while. The floods eventually cost the casino around $1 million, although the drop in revenues was slightly mitigated by cost cutting measures.

There Just Weren’t Enough Days

There’s nothing that can be done about this, but the month had one Friday and Saturday less. The casino would definitely have been able to notch up higher earnings if it had one additional weekend. But the question remains – how much more?

There Have Been Big Investments

The company has notched up a capex of $17.6 million this quarter, most of which has been spent on the Isle Capri Hotel Bettendorf. In fact, the company has capex plans of around $100 million for the next year since it needs to upgrade its slot games and pay for overall maintenance in order to provide customers with the experience they look for. This definitely seems like a huge expense, especially at a time when nature is interfering!

There Has Been a Lot of Competition

The Lake Charles casino has had to face direct competition from Landry’s Golden Nugget. However, it has managed to hold its own so far. Mississippi’s Lula Casino has taken a beating from its competitors, as has the Pompano Florida property, which has had to deal with the reopening of the Jai-Alai casino at Dania Beach. All these new casinos are direct competitors. They also have some great deals to attract new members who can eventually turn into regular and loyal customers.

Some Properties Have Performed Very Badly

The worst performances were by Colorado’s Black Hawk, Louisiana’s Lake Charles and Florida’s Pompano casinos. Since these three casinos bring in slightly less than half of the company’s revenues, its pointless to say that eight of its casinos did better than expected. These three casinos alone are responsible for a majority of the company’s revenues. It’s a shame they were not able to sustain themselves in this highly competitive world of gambling!

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A REIT is Out of the Question

The tax laws have changed recently, making it impossible for Isle of Capri to opt for the REIT route to increase its profitability. Furthermore, the company hasn’t had much success with any mergers. However, the company might attempt a stock buyback to deal with a portion of its debt.

Isle of Capri CEO, Hausler has admitted that the company needs to work on various aspects of its operations in order to deal with the slowdown in the industry. The company’s stock price has indeed climbed steadily over the past couple of years, but it will be hard to see how it can continue to expand revenues without having a clear vision to achieve it. We will just have to wait and see how Isle of Capri Casinos are able to bounce back from this recession.

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