Penn National Gaming Maximizes Its Potential
Penn National Gaming might not be as large as other casino companies, and it might not have exposure to Macao, which has been a saving grace for many casino companies over the past several years. However, Penn National Gaming does offer something that its peers do not.
The irony here is that multiple companies throughout the industry look to expand despite already being highly leveraged. In some cases, this will lead to extremely high risk. While Penn National Gaming is leveraged with $267.87 million in cash and short-term equivalents versus $2.40 billion in long-term debt, it generates strong cash flow. Penn National Gaming generated $597.39 million in operating cash flow over the past year. This is possible because it's a primarily cash-based operation, which stems from slots, table games, and pari-mutuel wagering.
Penn National Gaming relies on this cash flow for debt repayment, capital expenditures, funding future developments, and financing acquisitions. In regard to the latter, Penn National Gaming aims for attractive regional markets. Currently, Penn National Gaming has 28 locations in 18 states. It used to operate in 19 states, but it sold its Bullwhackers property in Colorado. On the acquisition side, Penn National Gaming purchased Harrah's St. Louis from Caesars Entertainment for $610 million.
Caesars Entertainment needed to make this sale because of its precarious debt situation. It has debt of $21.54 billion (vs. $1.71 billion in cash and short-term equivalents to go along with negative operating cash flow of $287.40 million over the past 12 months). Caesars Entertainment also recently sold its Macao golf course for $438 million in order to help repay debt. It became obvious that the Macao government wasn't going to allow Caesars Entertainment to fully operate on the gaming side. Although Caesars Entertainment bought the golf course for $578 million in 2007, this appeared to be a wise and necessary move.
Getting back to Penn National Gaming, it made other recent moves which include opening several casinos; Hollywood Casino at Kansas Speedway, Hollywood Casino Toledo, and Hollywood Casino Columbus.
Penn National Gaming appears more fiscally responsible than its peers, primarily because of its business model, but that doesn't guarantee future success.
Reasons for concern and spin-off
Penn National Gaming saw soft regional gaming revenue trends during the third quarter. It attributed this softening to high unemployment levels, lower consumer confidence, increased taxes, and reduced discretionary spending. It also stated that its expansion into more regional markets has led to increased competition.
Furthermore, Penn National Gaming chose to temporarily suspend financial guidance. This is often a red flag, but in this case it's justifiable since Penn National Gaming spun-off Gaming and Leisure Properties . This was a strategic move because it allowed Penn National Gaming to enter previously blocked markets. Since Gaming and Leisure Properties is a REIT, it can enter more markets and act as a landlord and operator.
With the spin-off of Gaming and Leisure Properties, Penn National Gaming can enter every major domestic market with the exceptions of Las Vegas and New Jersey. However, the decisions to avoid entering these two markets are based on two very different reasons. Penn National Gaming hasn't entered the Las Vegas market because it can't find the right value proposition. That has the potential to change in the future. Its decision not to enter the Las Vegas market right now because it can't find the right deal is a tribute to management's poise and fiscal responsibility. Penn National Gaming has opted not to enter the New Jersey market simply because it doesn't want to be there. In other words, potential isn't high in Atlantic City.
The bottom line
Penn National Gaming is a well-run company with a methodical and disciplined approach to growth. It's also likely to offer more long-term investment potential than many of its peers. On the other hand, regardless of how well the company is run, it can't avoid macroeconomic conditions and a hesitant consumer with reduced discretionary income. Either way, Penn National is worth keeping an eye on. As always Foolish investors should do their own research before making any investment decisions.
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