• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

It’s all about liquidity and capital deployment. The gaming industry had too much of the former and failed miserably with the latter. As a result, the gaming operators are grounded in the silos of high leverage, escalating borrowing costs, and declining return metrics. And there is no one on the horizon to push the launch button. All one can hope for is cash flow stability as deleveraging becomes the main goal. Almost a microcosm of the US consumer, no?

Deleveraging is not exactly a compelling investment theme. A terrific balance sheet, excess liquidity, growing acquisition opportunities, and a return focused management team; now there’s an investment thesis. I’m referring to PENN, of course. I’ve made some calculations assuming PENN deploys its excess liquidity into gaming assets and/or companies at 7x EBITDA. The two scenarios assume capital expended to reach leverage ratios of 4x and 4.5x, respectively, both below the industry average at 5x for public gaming operators. PENN’s target leverage is 4.5x so that is the more realistic ratio. In this scenario, ROIC remains constant with EBITDA acquisitions at 7x, although lower multiple opportunities might become available if the company is patient. ROE, however, explodes as PENN adds leverage, up to almost 18% at 4.5x. It might be time to get in now before those missiles are deployed.

Unlike the industry, PENN can actually leverage up ROE