PENN: THE BENEFICIARY OF LOW EXPECTATIONS

The Q2 bar was set low and should be easily cleared.  Encouragingly, July is showing a pick up so expect higher than consensus Q3 guidance and commentary.


 

THE CALL TO ACTION

PENN reports Q2 earnings on Thursday and we project a beat.  Moreover, management guidance – while always tempered – should be better than Q3 consensus.  Our read into July is that YoY growth in regional gaming has improved considerably from the 1H 2014.  In fact, while we’re still anticipating a YoY same store decline in regional gaming revenues (see chart below), the drop could be the smallest since October/November.  Certainly not the most powerful long term thesis but on the margin, for a stock suffering from the “soft bigotry of low expectations”, a beat and raise could spark a nice move higher.

 

THE ESTIMATES

We’re projecting Q2 EBITDA and EPS of $82 million and $0.10 versus the Street at $77 million and $0.08, respectively.  For Q3, our estimates are $68 million and $0.07 – again above the Street at $60 million and $0.03.

 

THE SETUP

In our note on May 14, 2014 titled "Regional Gaming: Trend Friend" we highlighted:

  • Q2 is shaping up nicely relative to reduced guidance as we were hearing May was showing improvement from April.
  • Insiders at both PENN and PNK have bought stock in the last week – obviously, a positive signal.  BYD management, did you hear that?

Then, on June 3, 2014, in our note "Regional Gaming Catalysts, Positive?" we focused on:

  • Best May weather ever - sunny, blue skies and very few thunderstorms/tornados coupled with one extra Saturday provide a base for accelerating (less bad) regional results for May and June – and a potentially positive revision of estimates as the year develops
  • As we view regional gaming estimates, Q2 estimates should not be revised lower and could have an upside bias for BYD, PENN, and PNK.

Since then, June monthly results were down versus May and lower than our projections.  Reworking the models has us less enthusiastic regarding BYD and PNK Q2 earnings but not for PENN. 

 

Looking ahead to July, our model is projecting only a 2% YoY decline in same store sales for the mature regional gaming markets versus the 7% drop generated in June.  Morever, our advance read into Missouri and Pennsylvania suggests our estimate could be too low.  We believe both of those markets are markedly in the black on a YoY basis relative to our expectations of another monthly decline.  Could the regionals post their first monthly increase in SSS since November 2012?  Now that would be a catalyst. 

 

PENN: THE BENEFICIARY OF LOW EXPECTATIONS - ff

 

THE CONCLUSION

While always sober, management could be a little more positive with their forward commentary on the conference call tomorrow.  We’re already expecting a beat and higher than consensus Q3 guidance.  Indeed, anecdotal evidence more than supports our sequential improvement thesis.  Yes, the environment remains challenged and the demographic headwinds stiff, but with a high beta stock such as PENN and low expectations, pivots like this should have an outsized impact.


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