Ameristar Casinos issued its Q2 earnings release and it couldn’t have been easier to predict. Similar to virtually every other quarterly release in the sector, Q2 Adjusted EPS met reduced estimates but exceeded GAAP EPS (see my 8/4/08 posting “ADJUSTED EPS: TAKE THE GOOD, LEAVE THE BAD”). Q2 revenues missed expectations but SG&A made up the difference. Layoffs were, of course, announced. Finally, ASCA implicitly lowered expectations for the rest of the year. Our summer interns could’ve predicted the contents of this release right down to the number of terminated employees.

So where does this leave us? ASCA is an economically sensitive stock with few catalysts. The positive catalysts that do exist are related to November state referendums: table limit betting increase in Colorado and the loss limit removal in Missouri. There are other ways to play those catalysts. The downside catalysts are more numerous: The economy and gas prices, a leveraged balance sheet and big debt maturities in 2010 ($1.3bn), and new casinos in Kansas and St. Louis. Let’s not forget the near term biggie: the hit on Ameristar East Chicago from the massive expansion and renovation of the Horseshoe in Northern Indiana.

PENN is not without its own economic vulnerability. However, I keep coming back to liquidity. To me liquidity is the single most differentiating factor in this struggling industry. Why would I pay the same multiple for ASCA as I would for PENN, the gaming company with the most liquidity, run by the best stewards of capital. PNK also looks more attractive at a 0.5-1.0x multiple discount and a buffer from the economic environment due to its Texas exposure. For those targeting ASCA as an acquisition candidate; that may eventually be the case but it likely won’t be PENN on the other end of that transaction. If PENN is buying any company it will be PNK.

If ASCA can raise $500m in sub debt this year liquidity runs dry in 2010. If they can't....