PNK/ASCA: THINGS TO THINK ABOUT

PNK wants this deal so a forced sale of properties to comply with the FTC is likely.

 

 

The big catalyst for PNK has gotten less attractive thanks to Big Government.  The FTC’s ruling yesterday will likely force PNK to divest assets in Lake Charles and St. Louis and delay the closing until the end of the year.  Forced sales are rarely value creating for the seller and this situation could be even worse - there just aren’t a lot of buyers.  We calculate $2.50 to $3.00 per share in lost value although some of that was reflected in the stock yesterday.

 

We assume PNK will divest its Lumiere Place in St. Louis and the yet to open Ameristar Lake Charles.  Assuming 7x 2015 EBITDA multiples and the time value of the delay, we project the “new” deal will cost the stock $2.50-3.00 in value.  The multiple for Ameristar Lake Charles is debatable and could even be considered high.  Texas is likely to legalize casinos at some point, in the future, which would likely decimate the profitability of these border town casinos.  PENN has indicated in the past that it is not interested in the Lake Charles market because of this threat.  For this reason and its similar concentration as PNK in St. Louis, we do not believe PENN would be a buyer of these properties.

 

The deal is still worth doing, in our opinion, and PNK seems to believe the same.  However, even with the 8% drop in the stock yesterday, we are less positive than most with the stock at $19.  While we’ve been right on the fundamentals, we’ve been wrong on the stock.  However, the catalyst has been pushed off and sentiment could turn negative.  Here are some of our thoughts:

  • PNK is doubling down on a space that faces the huge secular headwind of dying customers.  Baby Boomers appear to be the last generation of slot players.  Approximately 90% of regional gaming profits is derived from slots.  We’ve written extensively on the demographics and the lack of younger players.  Slot volumes continue to fall despite better economic conditions.  We’re not sure how regional gamers can overcome this potentially disastrous trend.
  • Yes, housing is getting better but the wealth effect takes time to build.  We’ve also written extensively on the strong impact of housing prices on gaming revenues over the last 15-20 years.  The statistical relationship is there but we feel it will take time and continued increases in home prices for this correlation to resume.  It hasn’t yet.
  • Texas – we think it’s inevitable.  Over 60% of PNK’s property EBITDA is derived in Louisiana.  Sure, this percentage will fall with the ASCA buyout and Ameristar Lake Charles divestiture but leverage is going way up.
  • May might look better in the regional markets but June is likely to move back into negative SSS territory.  Slot volumes are not going to surge anytime soon in our opinion which makes estimates still look aggressive.  Following the acquisition, leverage will increase to 6.0-6.5x which will look even worse in a declining estimate environment.   
  • We don’t believe PNK can cut the full $55 million in corporate expense out of ASCA.  It may not be widely known that ASCA actually allocates some costs to corporate that most operators push out to the properties.  This accounting treatment contributes to industry high property margins but also higher corporate expense as a % of revenues.  We think $35-40 million in expense reduction is the right number. 
  • The FTC delay increases the probability of a competing bid

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more