PNK’S Q1 THEME

PNK should post a very strong Q1 that we believe will exceed expectations and last year’s performance.  In fact, the size of the beat could be significant as indicated in the first chart.  We project EPS of $0.02 and EBITDA of $47.5 million versus the Street at ($0.02) and $45 million, respectively.  Our estimates may even prove too conservative.  Look for strong revenue and margins at Lumiere Place and in Louisiana to drive the upside. 

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Management usually puts forward a theme with every conference call.  This quarter the theme could be particularly interesting, and positive.  We’ve talked a lot about the rising cost of capital, particularly for gaming companies that face covenant, liquidity, and/or refinancing issues.  PNK faces little probability of a covenant breach this year but could be at risk next year.  The safety play is to try and extend, amend, or refinance its current facility which matures 12/2010.  That will mean a significantly higher cost of borrowing.  Depending on the agreement, PNK could pay 300-400bps more on the credit facility.  If the company opts for a high yield offering, the interest rate on this type of debt could approach 15-18%.  Of course, there would be no need to tap the high yield market if PNK cancels development.

I recognize this doesn’t sound positive.  However, the takeaway is that the higher cost of capital may force PNK to delay or suspend development on the Sugarcane Bay and Baton Rouge projects.  I think this would be taken very positively by Street.  It would signal to the investment community that PNK is, indeed, return focused (a frequent criticism of management).  With the cost of capital so high, it’s hard to justify investing in the space.

Thus, the theme will not be “our borrowing costs are going up”.  Rather, the relevant theme may be the transformation of PNK into an IRR-focused, free cash flow machine; a pretty powerful theme indeed.


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