Penn National Gaming reported strong third quarter results Thursday morning, but noted that it would be adversely impacted by the gambling expansion package currently working its way through the Pennsylvania legislature and will consider legal recourse.
The package, passed last night by the Senate and this morning by the House, would allow for 10 satellite casinos across the state, online gambling and sports betting and gambling in truck stops and airports.
This expansion would have a negative impact on Penn National’s property near Harrisburg, the state capital, Eric Schippers, vice president of public affairs, told the Reading Eagle, adding that the 470 page bill was an “ill-conceived plan that has been rushed through” and that the company would consider contesting it in court.
“We’re considering our legal options, because this would have a uniquely punitive effect on our casino, more so than any other casino in the state,” he said.
The development came on the same day that it reported third quarter revenues of $806 million, topping consensus estimates by $10 million and previously-issued company guidance by $15 million.
Adjusted EBITDA was $222 million, up 5 percent year-over-year and in line with Wall Street estimates, while income from continuing operations grew 3 percent to $143.7 million.
“The third quarter marked another period of strong spend per visit trends across all three of our operating segments, leading to consolidated positive same facility revenue and adjusted EBITDA growth that exceeded guidance,” said Timothy J. Wilmott, chief executive officer.
Wilmott highlighted continued margin improvement as a key profit driver during the quarter.
“Our consistency in extracting operating efficiencies drove consolidated third quarter 2017 Adjusted EBITDA margins to 27.5 percent, an improvement over last year when excluding volatility related to the cash-settled stock-based awards,” he said, adding that the company had retained third party consultants to help find new cost savings and improve margins moving ahead.
The resiliency of Penn National’s property in Charles Town, West Virginia, in the face of new competition in the region remains an ongoing surprise.
“Headwinds at Charles Town continued yet were manageable in the third quarter, with gross gaming revenue at the property down 10 percent. With the December lapping of the National Harbor open and October results tracking well thus far, we see GGR at the property stabilizing as soon as the first quarter of 2018,” said Chad Beynon of Macquarie Research.
But the Pennsylvania gambling expansion package presents further looming headwinds. The bill calls for the creation of a 25 mile buffer zone around each of the state’s existing casinos to protect their market from the 10 new satellite casinos.
But more than two-thirds of Penn National’s customers at its property outside Harrisburg come from further away than 25 miles, putting the majority of its client base at risk of being siphoned off by the new competition.
The company also announced that it had repurchased 1.3 million shares at an average price of $22.41 per share during the quarter.
“It remains clear to us that Penn continues to benefit from a healthy regional gaming consumer, which has gradually accelerated the company’s cash flow growth, in turn providing management with the ammo needed to fund its thoughtful return of capital initiatives,” wrote Steven M. Wieczynski, an analyst with Stifel Nicolaus, in a note to clients.
It also paid off $60 million in debt, reducing its total debt load to $1.05 billion and its debt to adjusted EBITDA ratio to 2.59 times by the end of the quarter – down from 2.95 times at the end of 2016.
Penn National shares were trading down Thursday morning at $24.40 after closing Wednesday at $25.37.
