Provides Compelling Opp. Investment conclusion: PENN remains our preferred way to play the recovery in domestic gaming revenues. We believe there is upside to current 2011 and 2012 consensus estimates, as same-store growth estimates remain achievable / beatable through 2012 and the Ohio leg of the company’s development pipeline opens. That said, we expect PENN to be a “one-step-back, twosteps- forward” stock, as potential legislative changes in Ohio could cause negative estimate revisions in the near term. We believe these short-term revisions should provide a compelling buying opportunity, as consensus estimates still need to come up, as consensus Ohio projections remain 100% too low, in our view. (We note that we do not expect Ohio State coach Jim Tressel’s resignation to affect our future Columbus projections.) Potential changes to Ohio gaming legislation could negatively impact our EBITDA forecasts by $26 mn ($2 / share)… Driven by the state’s desire to solve its budget shortfall, the governor of Ohio and the state legislature are considering increasing gaming taxes and/or license fees. We believe a slightly negative interpretation of the Commercial Activity Tax (CAT) is the most likely outcome. We estimate the imposition of a CAT tax would increase the effective gaming tax rate from 33% to 37%, which would impact our PT by $2. … however, we believe improving same-store revenue trends could offset the any potential tax impact. We currently project 1% same-store revenue declines for PENN through 2012. Given recent improvements in regional revenue and employment trends, our view skews to our Bull Case, which implies 1% annual growth (+$23 mn of EBITDA (+$2 / share)). 50% Total EBITDA Growth through 2013. We believe investors focusing solely on competitive and regulatory impacts miss the fact that, on a net basis, PENN can grow EBITDA by 50% over the next three years, the highest rate in our coverage universe.
Penn seems to weather the storms of Nasdaq very well , (forget he V shaped recovery) looks like the right people bought in.
Anthony Marnell commented, “The staff and management of M Resort are delighted to be joining forces with Penn National as they share our commitment to delivering exceptional guest service throughout their broad portfolio of regional gaming facilities. Penn National has brought financial stability to the facility and we look forward to welcoming Penn National customers from other markets and providing them with a first class Las Vegas experience while continuing to serve our loyal base of local customers.”
Price Target $45 Equal to Base-Case scenario Bull Case $50 (Implies 8.5x EV/ EBITDA) New developments outperform; Brisk regional recovery New developments generate incremental EBITDA of $300mm by 2013 Upfront cannibalization impact is moderate ($40mm EBITDA impact in 2013) Organic same-store EBITDA CAGR of 8% through 2012 Base Case $45 (Implies 8.2x EV/ EBITDA) New developments offset cannibalization; Moderate regional recovery New developments generate total incremental EBITDA of $260mm by 2013 Cannibalization impact is significant ($60mm EBITDA impact in 2013) Organic same-store EBITDA CAGR of ~6% through 2012 Bear Case $34 (Implies 7.9x EV/EBITDA) Project delays; Significant cannibalization; Weak regional recovery Returns from new developments are below expectations (EBITDA of $195mm) Cannibalization impact is significant (~$100mm EBITDA impact in 2013) Organic same-store EBITDA increases 2-3% annually through 2012