Sluggish top line is well known but margin upside is likely going forward.
As we pointed out in our “PNK: MOVING INTO OVERSOLD TERRITORY” post on 7/7/10, the Street is likely underestimating PNK’s margin potential and the magnitude of the properties’ marketing underperformance. PNK’s properties have generally underperformed the important metrics of revenue per slot and profit margins. We believe the new management is a vast improvement to the empire builders of the past. While progress will be gradual – only some margin improvement will be evident in the Q – PNK is an intermediate term secular margin story. In other words, PNK has margin expansion potential that its competitors do not.
For the quarter, we are at $49.6 million in adjusted EBITDA, slightly below the Street. Given the regional top line trends, we believe whisper expectations are low. The driver for the stock will be margin expectations for the future which we believe will be ratcheted northward. Cost cutting should be a two year story, consistent with other gaming operators. The difference is that the other operators began cutting in 2008. We expect cost cutting to fuel margin improvement through the end of 2011, even if top line trends remain sluggish. We cannot say that for the other gaming operators.
We do harbor some longer term concerns: the consumer, particularly as it relates to domestic gaming spend, and the long-term impact of political pressure on Gulf drilling as the oil industry drives 16% of Louisiana’s economy. However, the influx of relief workers related to the oil spill should have a net positive impact on near-term business.
For all of 2010, we are projecting $207 million in adjusted EBITDA, $10m above the Street. The differential grows in 2011, $245m versus the Street at $228m. That puts the valuation at only 6.1x 2011 EV/EBITDA. Excluding construction in progress associated with Baton Rouge, which won’t contribute any EBITDA in 2011, the valuation falls below 6x.
