PENN: ANY MARGIN GAS LEFT IN THE TANK?

With the exception of a couple of properties, top line trends have been less than inspiring. PENN needs to pull the cost cutting lever to make the quarter.

 

 

Same store sales (SSS) be damned.  2010 was supposed to be a year of recovery for US gaming markets following an awful 2009.  Easy comparisons have become not so easy.  PENN’s Q2 SSS fell 10% in 2008 and another 3% in 2009.  Still, we project Q2 SSS will decline 7% further in 2010. 

 

For Q2, we expect that EBITDA and EPS will fall slightly short of management’s guidance of $0.26 and $141.5 million, respectively.  For the year, our EPS and EBITDA projections of $1.12 and $575 million, respectively, are close to management’s guidance of $1.13 and $578 million.  At the time of management’s last update, we thought they were padding guidance.  However, casino revenues have remained sluggish and their previous guidance looks reasonable.

 

Lawrenceburg and the Hollywood Casino in PA are the only two properties showing year over year growth.  However, Lawrenceburg will have lapped the Q2 2009 expansion by the start of Q3 2010, thus impeding further growth.  PA should continue to grow with the advent of table games later this year. 

 

We remain positive on the long-term prospects for PENN.  Management is strong and the company does maintain a growth pipeline consisting of projects in NEW markets.  Thus, investment returns will be significantly higher and exceed PENN’s cost of capital.  The Ohio projects should contribute up to 25-30% CAGR in EPS from 2010 to 2013.  Our hang up remains domestic gaming trends and the macro environment.  Gaming revenues are tied to housing and GDP and the Hedgeye macro call is fairly negative on these important metrics.  Still, the valuation of 7x 2011 EV/EBITDA is reasonable for the growth and certainly attractive on a relative basis for patient investors.


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