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THE PINNACLE’S DILEMMA

We’ve liked this one. So far so good. As we discussed in our 11/11/08 post, “LIKE PEANUT BUTTER AND CHOCOLATE”, there is a decent likelihood that PENN makes a run at PNK. Furthermore, the valuation looks reasonable, even after the recent run-up. The stock is up 133% since our 10/29/08 opus, “A SHORT SQUEEZE COMMETH” highlighted PNK as having the most upside.

Analyzing operations is where it gets tricky. The removal of the Missouri loss limit in early November continues to have a positive impact and will probably result in at least 10% revenue growth. PNK probably reported the strongest Q3 of all of the gaming/lodging operators. Approximately 75% of the company’s EBITDA is generated in Louisiana. Due to the relative strength of the Texas economy this year, those markets have done well. As we discussed in our recent unemployment posts, the Texas economy is deteriorating, perhaps at a faster rate than most of the country. Given the recent strength, it is the delta here that is disconcerting.

The important metro markets for PNK are Houston, New Orleans, Cincinnati, St. Louis, and Dallas/Shreveport. The recent unemployment trends are charted below and they aren’t pretty, on a year over year and sequential basis. Given the size of PNK’s properties on those markets, the sequential trends in Houston and New Orleans warrant the most concern. Obviously, oil is a major component of some of these local economies so the escalating unemployment shouldn’t be a surprise.

Thus far, through early December, our sources indicate that gaming revenues have held up pretty well in Louisiana, despite the plunge in oil. Q4 probably looks as safe as any gaming operator out there. However, unemployment is a statistically significant macro factor in driving gaming revenues so Q1 could be at risk.

Unlike most operators, positive catalysts remain for PNK. If the Texas and Louisiana economies were to stabilize there would be no dilemma.

Despite the deteriorating unemployment trends in LA/TX, PNK's gaming revs there are holding up