In a mixed third quarter earnings report, Penn National Gaming fell short of its guidance on net revenues and EBITDA, but beat its projected net income and earnings per share.
The regional gaming company posted revenues of $765.6 million and EBITDA of $211.3 million, both checking in slightly below internal forecasts. Net income and earnings per share for the quarter registered $46.5 million and $0.51, respectively, roughly 75 percent higher than company projections.
A stronger than expected performance in the Northeast and Midwest regions – particularly Ohio – offset weaker than anticipated numbers in the South and West, which were due in part to ongoing struggles in the energy-based economies of Mississippi and New Mexico and the loss in EBITDA from a three month regulatory delay in opening its Jamul Hollywood Casino in San Diego on October 10.
A realization of $7 million in savings from cutting corporate overhead and a greater than expected contribution from newly acquired interactive gaming assets.
“Third quarter regional gaming industry trends were largely similar to the second quarter. Quarterly adjusted EBITDA of $211.3 million was slightly below guidance as shortfalls at certain properties were almost offset by lower corporate overhead and stock based compensation expenses and initial contributions from Rocket Games which we acquired in August,” chief executive Timothy Wilmott said in a prepared statement.
“PENN benefitted from $7[million] in lower corporate costs than we had been forecasting. All in, the quarter was mixed with revenues in-line, but property EBITDA below expectations,” wrote Cameron McKnight of Wells Fargo Securities in a note to clients.
Wilmott also emphasized that the company’s results must be taken within the context of the broader regional gaming market which has been negatively affected by weather and economic issues across the country this year.
“In the third quarter, consistent with other businesses dependent on consumer discretionary spending, the regional gaming industry continued to experience uneven performance as a result of what we believe to be a combination of macroeconomic factors and an uncertain political landscape,” he said.
Wilmott touted the company’s strong cash flow generation and the interest income it is receiving from a loan to the Jamul tribe as drivers of its successful efforts to pay down debt. The company has decreased its leverage ratio to 5.76x, down from 6.62 in December 2015, and that trend is expected to continue.
“Penn National has significantly reduced its leverage levels since the end of the third quarter as we announced last week that the Company applied approximately $274 million against our outstanding revolving credit facility resulting from the proceeds received from the Jamul Tribe’s recent refinancing transaction,” Wilmott said in reference to the $460 million refinancing announced on October 20.
Despite the mixed quarter, analysts and the investment community affirmed that Penn National’s performance was largely in line with expectations and were confident that the fundamentals were in place for strong future growth.
“The weaker than expected results in the context of broader consumer concerns should result in modest pressure on the shares,” wrote David Katz of the Telsey Group. “In spite of the weakness in the quarter, overall growth appears to more than offset competitive headwinds, which should push the shares higher over time.”
“Though we are fans of what PENN is doing on the interactive front and are encouraged by the speed with which this business is ramping for the company, we suspect most investors will remain hyper-focused on results at the brick and mortar assets at this point,” wrote Steven M. Wieczynski of Stifel Nicolaus Capital Markets.
