PENN: Q4 GUIDANCE LESS THAN TOXIC

PENN had already pre-announced Q3 so those details are mostly trivial. The major takeaways from the release are 1) less than toxic Q4 guidance, and 2) final regulatory approvals for the Fortress Preferred security are only days/weeks away, and 3) PENN looks like it serious about acquisitions.
I would characterize Q4 EBITDA and EPS guidance $145 million and $0.28, respectively, as pretty much right in-line with current consensus estimates. The official Reuters estimates are $146 million and $0.29 but they include dated numbers and typically slow moving outliers. Practically, given the recent deterioration in the economy and consumer confidence, the guidance looks pretty good actually.

Regarding the regulatory approvals related to the Preferred deal, management indicated a late October/early November closing. The cash has already been deposited with an escrow agent. This deal looks like it will close and that is good news.

Finally, in an interesting preview of how the company may deploy its excess liquidity, management is setting up an unrestricted subsidiary to invest in its own debt/equity or the debt/equity of other gaming companies. We believe the latter/latter is most likely. I wrote about an interesting transaction structure PENN might pursue in my 7/25/08 post “PENN: BASSET SWAPS AND VALUE CREATION”. As discussed, PENN could buy up another gaming company’s bonds on the cheap and trade them to the company in exchange for a coveted asset.

Economic headwinds remain and the November referendums could bring additional competition. However, PENN’s industry leading liquidity and balance sheet should lead to relative outperformance over the long-term, particularly considering the external credit crisis. Free cash flow is accelerating and should turn positive by Q2 2009. Likely due to the referendum overhang, the stock trades in-line with the peer group.
I personally own shares of PENN

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