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PENN reports Q3 tomorrow morning. It shouldn’t be that bad despite the regional softness.  We’re still worried about the duration of this downturn.

We’re projecting EBITDA of $160 million which is in-line with the Street, although our revenue projection of $629 million is a little below the Street at $641 million.  Our EPS estimate is $0.36, above the Street consensus of $0.34 due primarily to lower interest expense.

Q3 should not be a make-or-break quarter for PENN.  The stock is appropriately off its recent high of $33.67 (July 28th) due to sluggish regional revenues, despite the up move in the market.  Rather than focus on the Q3 results, we see two main catalysts:

  1. The duration of the downturn – we think well into 2010.  We’ve proven gas prices to be a statistically significant variable in explaining regional gaming revenues.  The easy gas comparison reverses in late November then is quite ugly through the first half of 2010.  Assuming the current price holds, YoY monthly gas prices will show a decline ranging from +50% in December down to +13% YoY in May 2010.
  2. Using their dry powder – PENN has over $1.5 billion in excess cash and credit availability that it could put to work.  Fontainebleau is obviously the odds on favorite.  The good news is that levering up this underleveraged balance sheet probably creates equity value over the near term.  The bad news is that acquisition multiples may be higher than the Street is anticipating and, in the case of Fontainebleau, realized cash flow may be a ways off.

For those of you interested in “YouTubing” management from Q2 please note the following:

PENN “YOUTUBE” FROM Q2

CURRENT TRENDS

  • “So, July is looking pretty nice and we feel comfortable with that, but who the heck knows what August is going to look like. We are in that kind of a mode. So, if we are a little mushy on that kind of question it is because that is all we can do.”
  • “I don’t think we are seeing any rebound on consumer spending anywhere. It is still the same kind of trends. Overall as you look at the first six months of 2009 there are ups and downs through that period and July is more of the same.”
  • “While the current economic environment continues to impact the overall gaming industry, regional market revenue trends remain largely stable…while visitation levels at our facilities remain similar to prior periods, spend-per-visit is lower, reflecting the challenges presented to consumers by current macro-economic conditions."
  • “We are very pleased with their [Lawrenceburg and Joliet] performance and look forward to a good third and fourth quarter there as the July results, as bill highlighted, continue to be online with our expectations.”
  • “It is going to take three or four quarters for Lawrenceburg to get fully ramped up and stabilized. We also have some additional work that we want to do to upgrade the amenities in the pavilion that is going to occur over the next three or four quarters as well. Nothing significant, but we certainly have some restaurants that need upgraded and that is going to be occurring over the next 12 to 15 months, but in terms of when we think Lawrenceburg will be running on all cylinders, it is going to take a few quarters out there for us to expose the new product to as many new consumers as we possibly can and then get all of our marketing programs in place that support the new facility.”
  • “To give you some color on Penn National, I do want to say it appears now, after about two months of operation, that we are not seeing any material impact from Bethlehem in the numbers there. When you add back the 1x catch up regulatory fees we are running at EBITDA margins that are around 20%. I think we can do a little bit better than that going forward as we continue to grow the business. The revenue growth there continues to be good; it is still showing double-digit growth.”
  • Peter Carlino [on the impact of oil in Zia’s market]:  “Last year… In Hobbs, New Mexico we saw the hotels there running 100% occupancies with ADRs above $100.00 because of all of the workers that were coming in there that were correlated to the oil industry. This has been a trend we saw late in the first quarter, continuing in the second quarter, where we are seeing the local market and our feeder markets not nearly as robust as it was a year ago. Things won’t get better until we see oil above $70.00 a barrel. That is an unusual circumstance, because in our other businesses we obviously want to see gasoline prices low and consumers not being faced with that hurdle to get in their car and come visit us, but when the oil industry and the price of a barrel of oil is high it does help us there.”

GUIDANCE

PENN: A YOUTUBE PREVIEW - penn guidance Q3

  • Excludes expected gain from insurance proceeds related to Empress Casino Hotel fire;
  • Excludes any future Ohio lobbying expense;
  • Depreciation and amortization charges in 2009 of $195.5 million, with $51.2 million projected to be incurred in the third quarter of 2009;
  • Estimated non-cash stock compensation expenses of $31.4 million for 2009, with $8.2 million of the cost incurred in the third quarter of 2009;
  • Excludes potential impact of Company modifying debt obligations;
  • A diluted share count of approximately 107.1 million shares; and,
  • There will be no material changes in applicable legislation or regulation, world events, weather, economic conditions, or other circumstances beyond our control that may adversely affect the Company’s results of operations.
  • “For the year we expect total maintenance CapEx to be roughly $90.5 million and project CapEx will be roughly $216.7 for a total of $307.4. [doesn’t include any spending in Kansas, Ohio, or Maryland.  Also it doesn’t include reimbursements from insurance related to the Joliet fire as we work through replacing the pavilion]
  • Tax rate should be in the 43% range and it shouldn’t pick up in 4Q vs 3Q – it should remain flat.