So Bank of America/Merrill Lynch/US Government raises their 2009 EBITDA estimate by 14% or $24 million and jacks up 2010 by 12%. The 2009 EBITDA hike translates into $0.40 in incremental EPS for a company that is projected to generate no EPS in 2009, yet somehow that is “tweaking”, as the analyst described it.
This is disingenuous. Not only is the analysis disingenuous but it is faulty. Rather than raise his price target by the $3 required by the higher estimate, the analyst lowered his target multiple by a full turn or a $4 reduction. The net result? A target price reduction of $1 and presto: a negative spin on an outstanding quarter. I find it hard to process a lower target multiple when regional market trends are stabilizing in general, and actually improving for PNK.
Of course, this is probably not the sole cause of the strange reaction in PNK’s stock to numbers that surely bested even the whisper numbers. Ahead of the quarter, we were leaning towards sell before the news but the operating performance exceeded our most bullish projections. So why was the stock down? Here are some educated guesses.
• Fear of Texas – A bill was introduced in February to legalize slots in Texas. Most of PNK’s markets service the Texas population. However, there were absolutely no developments late last week. More importantly, we don’t think Texas will legalize slots any time soon.
• The large seller argument – This common explanation for unexplained down moves in stocks actually has some merit in this situation, so we hear.
• Increased Sugarcane Bay budget – PNK increased the scope and cost of its Lake Charles project by $50 million. Nobody likes to see more capex but this project has not even begun. I’m not particularly worried about this.
• Covenants - I actually feel a lot better about the covenant situation. After the strong Q4 results, a 2009 covenant breach is highly unlikely. The 2010 story is hardly dire and while a breach could occur, time is on PNK’s side and so will be the banks. I’m not worried.
• PNK is a gaming stock – What can I say about this? Despite stabilizing trends in the regional markets in general and strong trends for PNK, nobody wants to own gaming, until they do.
• Faulty analysis – See the discussion above.
This is disingenuous. Not only is the analysis disingenuous but it is faulty. Rather than raise his price target by the $3 required by the higher estimate, the analyst lowered his target multiple by a full turn or a $4 reduction. The net result? A target price reduction of $1 and presto: a negative spin on an outstanding quarter. I find it hard to process a lower target multiple when regional market trends are stabilizing in general, and actually improving for PNK.
Of course, this is probably not the sole cause of the strange reaction in PNK’s stock to numbers that surely bested even the whisper numbers. Ahead of the quarter, we were leaning towards sell before the news but the operating performance exceeded our most bullish projections. So why was the stock down? Here are some educated guesses.
• Fear of Texas – A bill was introduced in February to legalize slots in Texas. Most of PNK’s markets service the Texas population. However, there were absolutely no developments late last week. More importantly, we don’t think Texas will legalize slots any time soon.
• The large seller argument – This common explanation for unexplained down moves in stocks actually has some merit in this situation, so we hear.
• Increased Sugarcane Bay budget – PNK increased the scope and cost of its Lake Charles project by $50 million. Nobody likes to see more capex but this project has not even begun. I’m not particularly worried about this.
• Covenants - I actually feel a lot better about the covenant situation. After the strong Q4 results, a 2009 covenant breach is highly unlikely. The 2010 story is hardly dire and while a breach could occur, time is on PNK’s side and so will be the banks. I’m not worried.
• PNK is a gaming stock – What can I say about this? Despite stabilizing trends in the regional markets in general and strong trends for PNK, nobody wants to own gaming, until they do.
• Faulty analysis – See the discussion above.
