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An accounting change – but only for this period – obscures a significant miss at the property level

  • PNK missed our adjusted EBITDA estimate of $111 million by $5 million and the Street by $8 million.  On an adjusted EPS basis, the miss looks even worse $0.11 vs the Street at $0.32. 
  • As we suspected, PNK is adopting ASCA’s method of accounting for corporate expense which essentially boosts property level margins while elevating corporate expense.  This is part of the reason ASCA’s property level margins looked so strong on a relative basis.  To our knowledge, PNK is now the only operator to account for corporate expense in this manner.
  • The benefits of the accounting change are clear:  analysts place a higher multiple on property level EBITDA than they do on corporate expense.  Unfortunately, PNK did not adjust the prior year’s corporate in the same manner so margins look better on a YoY basis than they otherwise would.
  • With the acquisition of ASCA, the quarter was already messy but the accounting change further muddies the water.  Our takeaway is that Q3 was indeed a miss and forward estimates need to come down.