PENN: HUH?

A Q2 beat and unchanged implied 2H guidance. Might as well sell?  We beg to differ.

THE CALL TO ACTION

We’re buyers of PENN on the stock's weakness given likely better than expected July revenues to be released by the states in 1H of August, our expectation of a Q3 earnings beat, and the potential for a strong opening for PENN’s 2 new racinos opening in mid to late Q3. 

PENN’s stock took a surprising turn down following a strong market opening.  The 11% intraday reversal was likely driven by guidance confusion, PNK’s ugly results and an uncomfortable conference call, the weak performance by PNK’s new racino - Belterra Park, and animal spirits.

GUIDANCE CONFUSION

Admittedly, we thought management could’ve provided better Q3 guidance.  July is looking about 400bps better YoY than June per our model and supported by channel checks.  Indeed, revenue guidance was strong but the flow through looks pretty conservative.  Nevertheless, implied 2H guidance was unchanged, and Q3 guidance came in a little better than the Street when factoring out the Kansas City EBITDA adjustment and pre-opening expenses.  We think these items caused some investors to conclude that guidance was lowered and lower than the Street.  It wasn’t and forward estimates are likely not going down.

We remain above the Street and management guidance for Q3 to the tune of $5-6 million in EBITDA on an apples to apples basis.  The regional gaming states will begin to release July revenue figures in 2 weeks which should be another catalyst.  Finally, we suspect the Street is pessimistic regarding the Youngstown and Dayton racinos which should open August/September 2014.  Assuming no change in current regional gaming trends, we suspect the Street’s Q4 EBITDA estimate of $57 million will prove light as well.

JULY

Looking ahead to July, our model is projecting only a 1% YoY decline in same store sales for the mature regional gaming markets versus the 5% drop generated in June.  Our advance read into Missouri and Pennsylvania suggests both of those markets are in the black on a YoY basis relative to our previous expectation of another monthly decline.

THE PNK READ THROUGH

Indeed, PNK’s results were not encouraging.  But it had to catch up with them one of these quarters.  PENN has kept investors sober about regional gaming trends and the sell side estimates conservative.  We think that remains the case going forward.

There is no doubt that PNK’s Belterra Park racino has had a disastrous opening and investors are likely making the read through to PENN’s upcoming racino openings in Youngstown and Dayton. However, as PENN management pointed out on their conference call, these markets are much more isolated (see Toledo) and will face very little competition.  Location is everything when it comes to racinos.

ESTIMATES

On an apples to apples basis, excluding pre-opening but making management’s KC adjustments, we’re projecting Q3 and 2014 EBITDA of $71 and $290 million, respectively, versus management guidance of $66 and $279 million.