PENN/BYD: REGIONAL CASINO COMEBACK

Entering a “less bad” era?

CALL TO ACTION

Regional gaming stocks look poised to bounce higher heading in and through Q3 earnings.  Regional trends were better than the math predicted and certainly better than Street expectations for August.  Anecdotal sources and the math suggest September and October will be more of the same which could lead to Q3 earnings beats and positive conference call commentary regarding the start to Q4. Of note, Q4 2014 and Q1 2015 are very easy comps due to last winter's polar vortex and a potential El Nino this winter.  With little REIT conversion frothiness (PNK), we believe PENN and BYD are the best ways to play the short term regional resurgence.

Q3 EARNINGS BEATS

Owing to conservative guidance (finally), easy comparisons, and slightly improving fundamentals, we think PENN and BYD should beat Street Q3 EBITDA and EPS expectations:

IMPROVING REGIONAL GAMING TRENDS

As can be seen in the following chart, the 2^nd derivative of regional gaming growth has been positive since December 2013.  Moreover, August demand was better than we expected and, optically, September and October should look even better.  Certainly, much of the “strength” is due to easy comparisons and monthly volatility and we still harbor long-term demographic concerns.  However, company guidance was conservative for Q3 as are Street estimates.  Thus, Q3 earnings look very beatable and while forward guidance may remain conservative, the tone should be more positive. 

CONCLUSION

State gaming figures will be released starting next week and we expect August’s momentum to continue.  Analysts will likely begin raising Q3 estimates which should lead to higher stock prices for PENN and BYD.  PNK also could benefit but that stock seems event driven at this point as investors await the REIT spin decision.  PENN/BYD momentum could carry through the earnings calls and into November when the States release October figures.  Finally, stay tuned as Q4 2014 and Q1 2015 are very easy comps due to last winter's polar vortex and a potential El Nino this winter.