PENN posted a great quarter in a tough environment, exhibiting strong operations but also the importance of exposure to new markets. 



PENN’s new markets were table games in both PA and WV where the numbers are off the charts.  And there is more of that on the horizon.  While we remain concerned with domestic gaming demand in existing markets, consistent with history, ROIC in new markets will continue to outpace cost of capital by a wide margin.  Maryland had little impact on Q3 due to the late September opening but initial results suggest a 25% ROI.  Up next:  Toledo then Columbus, both 20%+ ROI opportunities.  In fact, as we wrote about in our 06/07/10 note, “COLUMBUS WILL DISCOVER THE AMERICAN CASINO”, Columbus could be the highest EBITDA-producing regional casino (non-Indian) in the country.  Both these properties and their Kansas casino are scheduled to open in 2012 but PENN won’t be done then.  The company recently positioned itself to own and operate three racetracks in Texas where there is a decent probability that slots at racetracks will be legalized sometime in the next five years.


New markets are great for most operators fortunate enough to get a license.  But that’s only part of it.  As demonstrated in Pennsylvania most recently, PENN seems to generate outsized ROIs.  Hollywood Casino is generating a 26% ROI on its $310 MM investment in PA.  Preliminary results in MD imply a 25% ROI on PENN’s newly opened casino there.  PENN keeps construction costs low – MD cost only $98 million – stays on budget, and operates efficiently.  Virtually every property/expansion PENN does comes in on time and on budget.  We expect the same from Ohio, Kansas, and Texas.  They also don’t overspend on their stock.  PENN bought back over a million shares at an average cost of $23.21 during the quarter.  The stock closed last night at $31.18.


PENN’s results this morning came in largely as we expected but much better than consensus – EBITDA of $162MM was actually $1MM better than our estimate while revenues were $4MM lower primarily due to our modeling of the newly acquired tracks.  Generally speaking, cost controls were better across the board, and flow through on the newly introduced table games in WV and PA was also stronger.


Here are the details of the quarter: 

  • At Charles Town, tables games lifting total property revenues by $32MM sequentially, while only increasing non-gaming tax related expenses by $6MM QoQ, resulting in 318bps of margin lift sequentially and a 373bps lift in margins YoY.
  • In Pennsylvania, table games lifted sequential revenues by $5MM but only increased non-gaming tax related expenses by $1MM, which resulted in EBITDA margins expanding 560bps YoY and 220bps sequentially.
  • Hollywood Aurora, Argosy Alton, Hollywood Bay St. Louis, Hollywood Slots & Raceway Bangor beat our EBITDA estimates handily  
    • At Aurora, net revenues came in $0.2MM ahead of our estimate, while costs (ex-taxes) were almost $1MM lower sequentially, despite flat revenues.
    • At Alton, revenues were $0.5MM better than we estimated and costs (ex-taxes) decreased QoQ despite revenue growth.
    • Despite more difficult cost comps, Hollywood Bay St. Louis continued to bring down expenses by 9% YoY
    • At Bangor, margins were almost 100bps better than we estimated driven by an 8% YoY reduction in expenses
  • Empress and Hollywood Tunica missed our EBITDA estimate by more than 10%
    • Empress reported net revenues that were $1MM higher than we estimated but margins were worse.  Despite revenues decreasing QoQ, operating expenses (ex –taxes) actually increased by $1MM.
    • Hollywood lost some share in Tunica, coming in at 6.5% vs. 7.2% last year and 6.9% in 2Q2010
  • The loss at Maryland Jockey Club was almost $3MM larger than we forecasted
  • Other stuff:
    • Corporate expense was $17MM, $2MM lower than we estimated
    • Net interest expense was $3MM higher
    • Bought back over 1m shares at an average cost of $23.21



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