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PENN Q3 REPORT CARD

Takeaway: Midwest margins were incredible and drove the EBITDA beat. Forward guidance unchanged despite higher margins indicating that demand is soft

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

PENN Q3 REPORT CARD - PENNH

 

 

OVERALL

  • BETTER:  Midwest margins were incredible and drove the EBITDA beat.  Forward guidance was unchanged despite higher margins indicating that demand is soft.

L’AUBERGE BATON ROUGE IMPACT

  • SAME:  Slightly lower than expected adverse impact from L'Auberge Baton Rouge on Hollywood Baton Rouge but the real impact will take about 4-5 months to materialize
  • PREVIOUSLY: "Baton Rouge, L'Auberge opened in Baton Rouge. Clearly to date that's having an impact on our property. It's fairly substantial."

IMPACT OF SCIOTO DOWNS:

  • SLIGHTLY WORSE:  expect pressure from Scioto Downs to continue.  Have reduced FTEs significantly at Lawrenceburg in Q4 due to poorer performance.
  • PREVIOUSLY: "We've clearly seen an impact from Scioto Downs opening in Columbus...on our Lawrenceburg facility. We have roughly 10% of our business comes out of the Columbus market for Lawrenceburg, and we have clearly felt the impact of that."

OHIO RAMP

  • BETTER:  Toledo exhibited a strong performance above company expectations.  Early results on Columbus are in-line with management expectations.  
  • PREVIOUSLY: "Table games play has been very strong. Similar to what we're seeing in Dayton, we saw a little bit of that in Columbus. For whatever reason, and I think maybe it's simply a function that it's a less mature market and it hasn't had a lot of exposure to gaming, but we're clearly seeing that the slot business is a little bit slower building than what we might have expected to happen. I would say at Toledo, we're basically on track, but we're well ahead of track on poker and tables. So, clearly both of those markets are a little stronger in Ohio. The slot business – for whatever reason, I think it's going to just develop over time."

CONSUMER CONFIDENCE

  • SAME:  Flat consumer trends in 3Q
  • "Generally not having any expectation that we're seeing any improvement in consumer confidence or unemployment levels as we think about the balance of 2012."

CAPEX

  • MIXED:  3Q - $147 million project capex (Columbus and Toledo mostly) and $14 million maintenance.  4Q - $155.5 million project capex and $24 million maintenance
  • PREVIOUSLY: "Project CapEx is expected to be roughly $160 million for the third quarter and roughly $88.9 million for the fourth quarter. Maintenance CapEx in the third quarter was roughly $23.7 million and maintenance CapEx for the fourth quarter were projected to be around $21.2 million."

VEGAS

  • SAME:  M Resorts continued to improve margins in spite of flat revenues.  Las Vegas Locals market continues to be sluggish and PENN doesn't see that environment to improve in 2013. 
  • PREVIOUSLY: "Generally more of the same. The locals market continues to be sluggish out there. Promotional activity is slightly more rational than what we saw a couple quarters ago. And we've certainly at the M continued to pare back our marketing expenses where we believe we can improve the profitability of our revenue streams."

IDEA ALERT: BUY IGT

Keith added IGT to our Real-Time Positions at $13.31. IGT's TREND support is at $12.91.

 

 

Following the release of IGT’s FQ4 earnings, we believe investors will turn their focus to 2013 where we are expecting 20%+  EPS growth on a stock trading at 11x earnings.  2013 Street estimates look like they need to go higher due to slot shipments to Canada, a faster roll out in Illinois, better performance of Double Down, and a much lower share count than currently modeled.  

 

IDEA ALERT:  BUY IGT - IGT


Idea Alert: WWW

Takeaway: With the European river card known and an increasingly favorable setup ahead just as the PLG acq hits the P&L, we continue to like WWW.

This note was originally published October 18, 2012 at 11:10 in Retail


We like WWW on the long-side following 3Q results. After last week’s more bullish outlook reflecting the upside in PLG deal accretion, the key question headed into the quarter was the state of Europe. We now have that river card confirming continued weakness which is expected through year-end. Importantly, the deceleration in sales is flattening at the same time comps get increasingly more favorable through the balance of Q4 and headed into 2013. With the stock trading at its near-term TRADE line of support, we added WWW on the long-side of our Real-Time Positions into the close yesterday.


Here are a few additional callouts following Q3 results:

  • Tepid sales growth appears to be stabilizing with catalysts for reacceleration ahead. WWW’s largest brand Merrell is launching its M-Connect initiative in Q4 and has retailers already pulling orders forward. While helping near-term results, the bigger contribution will be in Spring 2013.
  • Global at-once orders are up +MSD quarter-to-date and comps only get easier in upcoming months and quarters. Incremental sales growth of faster growing PLG hit this quarter as well.
  • Despite modest sales declines in the qtr, the Sales/Inventory spread remains positive for the second consecutive quarter. PLG margins are expected to drive expansion as is geographic mix along with fewer closeout sales.
  • Investors are looking through NT results to $4+ in EPS power in F14.

The bottom-line here is that we think European weakness is likely to stabilize and start reaccelerating as the company realizes incremental earnings from the PLG business over the next 2-3 quarters and investors start looking at ~$3.15 and $4.05+ in EPS in FY13 and FY14 respectively as the Street takes estimates higher (the deal is not yet in consensus numbers). WWW has a solid management team and a global platform to leverage its growing portfolio of brands.

 

Idea Alert: WWW - WWW TTT

 

WWW Risk Management Levels:

Idea Alert: WWW - WWW TTT Chart

 

WWW Looking solid in our SIGMA

Idea Alert: WWW - WWW S

 

 


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Idea Alert: WWW

Takeaway: With the European river card known and an increasingly favorable setup ahead just as the PLG acq hits the P&L, we continue to like WWW.


We like WWW on the long-side following 3Q results. After last week’s more bullish outlook reflecting the upside in PLG deal accretion, the key question headed into the quarter was the state of Europe. We now have that river card confirming continued weakness which is expected through year-end. Importantly, the deceleration in sales is flattening at the same time comps get increasingly more favorable through the balance of Q4 and headed into 2013. With the stock trading at its near-term TRADE line of support, we added WWW on the long-side of our Real-Time Positions into the close yesterday.


Here are a few additional callouts following Q3 results:

  • Tepid sales growth appears to be stabilizing with catalysts for reacceleration ahead. WWW’s largest brand Merrell is launching its M-Connect initiative in Q4 and has retailers already pulling orders forward. While helping near-term results, the bigger contribution will be in Spring 2013.
  • Global at-once orders are up +MSD quarter-to-date and comps only get easier in upcoming months and quarters. Incremental sales growth of faster growing PLG hit this quarter as well.
  • Despite modest sales declines in the qtr, the Sales/Inventory spread remains positive for the second consecutive quarter. PLG margins are expected to drive expansion as is geographic mix along with fewer closeout sales.
  • Investors are looking through NT results to $4+ in EPS power in F14.

The bottom-line here is that we think European weakness is likely to stabilize and start reaccelerating as the company realizes incremental earnings from the PLG business over the next 2-3 quarters and investors start looking at ~$3.15 and $4.05+ in EPS in FY13 and FY14 respectively as the Street takes estimates higher (the deal is not yet in consensus numbers). WWW has a solid management team and a global platform to leverage its growing portfolio of brands.

 

Idea Alert: WWW - WWW TTT

 

WWW Risk Management Levels:

Idea Alert: WWW - WWW TTT Chart

 

WWW Looking solid in our SIGMA

Idea Alert: WWW - WWW S

 

 


PENN 3Q12 CONF CALL NOTES

PENN 3Q12 CONF CALL NOTES

 


“Despite the still challenging economic environment, regional market revenue trends and customer visitation levels remain largely stable and Penn National’s third quarter revenue and adjusted EBITDA exceeded guidance when excluding lobbying expenses. Our results again highlight the benefits of expanding and diversifying our gaming operations as well as the dedication and focus of our corporate and property management teams who continue to enhance operating efficiencies and maintain a disciplined approach to marketing and promotional activities."


- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming

 

 

Q&A

  • Decline in win per unit per day at Toledo?  Opened 5 months ago in the summer season.  Just seeing normal evolution in months 4 and 5. From a database standpoint, they continue to sign up from customers. Have 200,000 customers signed up. With a 33% tax rate, they are very pleased with the flow-through and expect similar results in Columbus
  • Early results in Columbus are very good.  They had 25,000 visitors on Saturday.  Have lines to get into the poker rooms and tables are very busy.
  • 4Q guidance? Is it better or worse excluding St. Louis? The bulk of the difference in the increase of the guidance is due to St. Louis.
  • Promotional environment is very stable in the WV market.  Their Asian play continues to be very strong there.  Very rational and similar to pre-Maryland Live!.
  • If Question 7 in MD fails? They expect the State to recraft the bill on the issue of table games.
  • They are always trying to increase FCF/share
  • They are aggressively looking for opportunities everywhere.  The M&A environment is fine.  It does appear that sellers are recognizing the new normal and therefore there are more willing, reasonable sellers.  That's why you are seeing more transactions.
  • In MA: will the winner be the loser, given the risk of overspending?  They think that they have the best site and will spend up to a number that makes sense.  When they do their analysis, they are factoring in Hartford for about 5 years until another competitor crops up.  They also have a lower cost of capital than some of their competitors.
  • Generally their business that haven't been impacted by new supply are flat. Not seeing any uplift or major headwinds either.  Many of their markets have been impacted on new supply though.  So flat consumer trends. 
  • They are in the middle of their 2013 budgeting process.  Most property managers are projecting a stable environment.  Their biggest challenge is figuring out the impact of competition on their business. 
  • In 3Q, they saw a very rational promotional environment, which allowed them to cut back and still expand their margins.  Expect the same type of environment in 2013.
  • Too early to assess the behavior of their Columbus competitor.  They are feeling an impact in Lawrenceburg.  They are doing a lot to reduce expenses at Lawrenceburg.
  • Should the lobbying expenses be included as part of the project expense? They do not want to forecast how much they are planning to spend and it's not in the guidance. However, what's been spent is in the numbers. There are only 3 more weeks to keep spending anyway.
  • In MA, they don't have any lobbying expenses
  • Toledo is doing a little better than they thought, Charles Town is doing better than they thought.  Gulf Coast area is challenging though.
  • They have seen impact from Scioto on Lawrenceburg driven by Columbus originated customers. They are also working on moving down their cost structure.
  • When Horseshoe Cincinnati opens, they will see another influx of competition to which they will need to adjust their business and operating expenses
  • Capex:  3Q: $14MM maintenance, $147MM project capex (Columbus and Toledo mostly). 4Q: $155.5MM (24MM maintenance)
  • Cash:  $217.4MM
  • Debt:  $1.839BN Debt, $12MM capital leases. $2.176BN total
  • Impact of L'Auberge Baton Rouge?  This is the honeymoon period.  Usually it takes 4-5 months to feel the true impact of a competitor. So far the impact has been slightly less than they expected. 
  • Ontario gaming expansion:  Looking at a number of different markets in the province and are in discussions with the government there. Need to resolve the Toronto decisions first. Most of the markets they are looking at would not be impacted by Toronto and they are not interested in Toronto given the level of required capital investment
  • Texas:  Have a significant number of lobbyists pushing to allow Texans to vote on gaming expansion.  Their position is to allow gaming where it already exists (i.e. tracks)
  • Ohio:  Waiting for approvals from the Lottery and Racing Commission to relocate their tracks and hope to get those by year end. Design continues to evolve and continue to get better pricing. 
  • Vegas:  They continue to show improved margins at M despite flat revenues at the property.  Construction continues to move very slowly there.  2013 economic conditions should look similar to 2011 & 2012. 
  • Competitive pressures will soon be over since there aren't many more markets in the intermediate term that will add gaming
  • M resorts: they are very happy with the $230MM investment they made. They continue to see improved margins and expect that to continue in 2013. Once the locals market rebounds, there will be a lot of upside.  Their existing 390 rooms are showing good occupancy. 

 

 

HIGHLIGHTS FROM THE RELEASE

  • 3Q12 "results benefited from the opening Hollywood Casino Toledo in the second quarter of 2012 and last summer’s acquisition of M Resort. We are focused on expanding the EBITDA contributions from these facilities as we rationalize operating costs, and fine tune the slot floor mix and player marketing efforts, as well as the food and beverage and entertainment offerings."
  • "We are making continued progress towards the construction of the new $150 million integrated racing and VLT facilities in Austintown and Dayton. We anticipate both facilities will open sometime in 2014... Each facility expected to create approximately 1,000 permanent direct and indirect jobs"
  • "We intend to continue to aggressively inform Maryland voters on what we believe to be a flawed process that handicaps competition for a potential sixth casino license in Prince George’s County for National Harbor. We’ve sought a fair and balanced approach to this issue, but to date, the local process in Maryland continues to jeopardize the long-term viability of Rosecroft Raceway."
  • “In early November we expect to close on the acquisition of Harrah’s St. Louis in an accretive transaction. Harrah’s St. Louis will further expand Penn National’s regional operating platform with a facility that is well-positioned in another large, stable metropolitan market. Upon closing, we will re-brand Harrah’s St. Louis with the Company’s Hollywood brand, which is now deployed at thirteen of our properties across the country. We estimate the budget for re-branding the facility, refreshing areas of the gaming floor and aligning our IT and reporting functions to be $61 million. By prudently managing our capital structure, we were able to act on the St. Louis opportunity and further expand our property portfolio, and we intend to remain opportunistic with respect to other potential transactions.”

PENN 3Q12 CONF CALL NOTES - penng


MGM UP ON THIS?

This note was originally published October 18, 2012 at 09:36 in Gaming

 

MGM China announced that they accepted a Land Concession Contract from the Macau government.  The stock is bid up 6% on this news.  We don’t think people fully understand the process of developing a new casino property in Macau.  MGM Cotai still needs to be formally Gazetted and then obtain a construction permit before the 3 year construction timeline can even begin.

 

Here is the timeline for Wynn Cotai:

 

Land Concession Contract:  Sept 12, 2011  

Formal Gazette approval:  May 2, 2012

Building Permit:  ?????

 

Wynn Cotai hasn’t even gotten its construction permit yet.  If this same timeline holds for MGM, then we should expect Gazetting in 8 months and who knows when for the building permit.  Thus, it should be at least a year and more likely two before construction can even begin and 4-5 years before the property would open.  Our original expectation on the timing of the MGM Cotai opening was 2017-2018 so today’s announcement doesn’t change that.

 

We would fade this news.


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