Looking at just the raw numbers, Penn National Gaming’s third quarter results might not seem that impressive. Analysts said the company’s true story is about what’s to come.
The regional gaming giant will soon have added more than a dozen resorts since the quarter ended Sept. 30, closing its $2.8 billion acquisition of rival Pinnacle Entertainment in October and finalizing the $115 million purchase of Margaritaville Resort Casino in Bossier City, Louisiana next month.
Penn National is also seeking to build two satellite casinos in Pennsylvania, adding to the gaming market in its home state.
“We view the slightly lower than expected results as less consequential than the recently closed acquisition of Pinnacle,” said Jefferies gaming analyst David Katz. He acknowledged Penn’s projections of producing more than $1 billion of cash flow this year.
Deutsche Bank gaming analyst Carlo Santarelli said Penn’s third quarter results, “will create some questions for investors, at least in the short term,” but he also sees the stock as buying opportunity.
Penn National’s net revenue declined 2.1 percent in the quarter to $789.7 million. All four of the company’s reporting markets showed revenue declines during the quarter. However, the company said with the addition of the Pinnacle properties, Penn expects to report revenue of $1.15 billion when the fourth quarter ends in December.
Third quarter earnings for the company was $36.1 million, while earnings per share was 38 cents. Analysts polled by Zacks Investment Research had predicted earnings of 43 cents per share.
Both earnings figures were steep declines from the 2017 third quarter, which had a large income tax expense.
Penn National CEO Tim Wilmott said results from the company’s two Nevada casinos, Tropicana Las Vegas and M Resort in Henderson, helped off-set challenges in other company markets.
Wilmott used much of his prepared statement to discuss the company’s integration of the Pinnacle properties in the Penn system and growth beyond 2018. He said the cost savings from the merger will add to the company’s cash flow.
“With the expected significant free cash flow to be generated from our expanded base of operations, we are well-positioned to embark on an active leverage reduction program while pursuing accretive strategic growth investments, as well as evaluating opportunistic returns of capital to shareholders,” Wilmott said.
Stifel gaming analyst Steven Wieczynski called Penn’s third quarter results “a mixed bag” with revenues softer than expected, but better predicted regional margins. Wieczynski added that he believes the predicted $100 million in cost savings from the Pinnacle transaction will be higher “as the integration gathers steam.”
During a conference call with analysts, Penn National Chief Operating Officer Jay Snowden said the company’s Plainridge Park casino in Massachusetts saw some revenue declines in September, immediately following the openings of MGM Springfield in Massachusetts and a casino in Rhode Island. Customers, he said, wanted to check out the two resorts.
“We’ve seen trends in October come back to close to normalized level, so we don’t think that was the beginning of any new trend in Massachusetts,” Snowden said.
Even with 41 casinos in 18 states, Wilmott did not discount Penn making additional acquisitions, like the company’s Margaritaville purchase.
He said the Penn’s new Las Vegas service center – Pinnacle’s former corporate headquarters – allows the company to generate cost savings with additional acquisitions.
“We certainly will take advantage of opportunities like we had in Margaritaville,” Wilmott said. “If we get those opportunities that make sense (and) give us an expanded footprint beyond the 18 states, that’s important to us.”
Shares of Penn closed at $23.88 on the Nasdaq Thursday, down 40 cents or 1.65 percent.
Howard Stutz is the executive editor of CDC Gaming. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
