PENN NATIONAL GAMING — BUY, SELL, OR HOLD?

Penn National Gaming is headquartered in Wyomissing, Pennsylvania, near Reading in Berks County.  The Company owns 12 casinos, seven racetracks, and manages a casino in Ontario, Canada.  The casinos are located in Colorado, Illinois, Indiana, Iowa, Louisiana, Mississippi, and Missouri.  The Company’s three Thoroughbred racetracks are Black Gold at Zia Park in New Mexico, Charles Town Races and Slots in West Virginia, and Hollywood Casino at Penn National Race Course in Pennsylvania.  All three tracks have slots.  The Company’s harness tracks are Bangor Raceway in Maine, Freehold Raceway in New Jersey, and Raceway Park in Ohio.  The Bangor track has slots and the Ohio track in Toledo would be the site for a casino if Ohio voters pass a ballot initiative proposed for November 2009.  However, such initiatives have been turned down by Ohio voters four times.  The Company owns The Sanford-Orlando Kennel Club greyhound track.  Penn National Gaming operates six off-track-betting facilities in Maine, New Jersey, and Pennsylvania, and two advance deposit wagering properties: e-bet and Telebet.

On June 15, 2007, Penn National Gaming announced that it had agreed to be purchased by the private equity firm Fortress Investment Group LLC at a price of $67.00 per share.  Fortress ultimately decided not to follow through on the deal when Penn National Gaming’s stock price decreased dramatically, to the mid-$40 range by June 2008.   On July 3, 2008, Penn National Gaming entered into an agreement with Fortress and its affiliates terminating the agreement.  Penn National Gaming was paid $1.475 billion during 2008 in compensation.

With nearly $2.5 billion in revenues, Penn National Gaming is the third largest gaming firm in the United States. The Company has 930,335 square feet of gaming space, 27,735 slots, 409 gaming tables, 2037 hotel rooms, and 59 food outlets.  It employs about 15,500 people. Slightly more than 90% of the Company’s revenues come from gaming and most of the rest stems from food and beverages.

The Company’s revenues increased by 8.3% from 2006 to 2007 and then declined by 1% from 2007 to 2008. Earnings were $327.1 million in 2006, $160.1 million in 2007, and a negative $153.3 million in 2008.  Earnings per share were $3.88 in 2006, $1.81 in 2007, and minus $1.81 in 2008.  The 2006 earnings included $1.32 per share from discontinued operations. 

In the first quarter of 2009, Company revenues were up 9.2% over the same quarter of 2008.  It earned a net profit of $40.7 million in the first quarter 2009 and this is essentially the same as in the comparable quarter of 2008.

In 2007, the Company had a debt-to-equity ratio of 3.42, but this figure improved markedly to 1.52 in 2008.  Debt comprised 77.4% of the capital structure in 2007 and 60.4%in 2008. Penn National explained how it was able to reduce its debt:  “During the year ended December 31, 2008, our $2.725 billion senior secured credit facility amount outstanding decreased by $536.8 million, primarily due to principal payments on long-term debt, partially offset by the issuance of long-term debt for items such as payment for capital expenditures, funding associated with the opening of the Hollywood Casino at Penn National Race Course, privilege payments to the State of Kansas, and payments for income taxes owed and lobbying efforts, primarily in Ohio, Maryland, and Maine.  During the year ended December 31, 2008, we used a portion of the net proceeds from the Investment and the after-tax proceeds of the Cash Termination Fee [received from Fortress Investment Group] for the repayment of some of our existing debt, repurchases of our Common Stock, lobbying expenses for efforts in Ohio and the investment in corporate debt securities, with the remainder being invested primarily in short-term securities.”

Penn National Gaming identifies major risks impinging on its operations and results:

The Company’s operations are dependent on its continued licensing by state gaming commissions.  The loss of a license, in any jurisdiction in which the Company operates, could have a material adverse effect on future results of operations.

The Company is dependent on each gaming property’s local market for a significant number of its patrons and revenues.  If economic conditions in these areas deteriorate or additional gaming licenses are awarded in these markets, the Company’s results of operations could be adversely affected.

The Company is dependent on the economy of the United States…in general, and any deterioration in the national economic, energy, credit and capital markets could have a material adverse effect on future results of operations.

The Company is dependent upon a stable gaming and admission tax structure in the locations that it operates in. Any change in the tax structure could have a material adverse affect on future results of operations.

The U. S. economy has taken its toll on the Company.  In 2006, only two of its properties reported operating losses, whereas in 2007 this figure edged up to three, and then escalated to seven in 2008.

Another risk is that Penn National Gaming derives 37.5% of its net revenues from two properties-the Charles Town, West Virginia and Lawrenceburg, Indiana facilities.

As for the company’s outlook, management states: “…we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions, and property expansion in under-penetrated markets.”

Penn National Gaming’s stock has traded in the range of $11.82 to $47.08 over the past 52 weeks and closed at $28.49 on May 22, 2009.   The short interest in Penn National stock has decreased by nearly 26 percent in approximately the past month.  This statistic means that the number of investors who believe that Penn National stock will fall in price has dropped dramatically. 

Penn National Gaming is managed by experienced and proven top executives, backed up by a strong board of directors.  When the U. S. economy comes back and as consumers gain confidence and discretionary income, the Company is in a position to grow revenues and profits.  Penn National Gaming’s regional casinos have an advantage over Las Vegas in a down or recovering economy because players who live within easy driving distance of one of the Company’s facilities can save on travel costs.  Finally, revenues and profits for racetrack casinos, or racinos, have held up relatively well in the current recession, compared to other forms of gaming, and Penn National Gaming is strongly positioned in racinos.  This likely accounts for the Company’s return to profitability in the first quarter of 2009.  According to a report by the American Gaming Association, released on May 18, 2009, U. S. racino revenues tripled from 2002 to 2008, to $6.19 billion, and soared in 2008 by 17.2%. 

Bill Shanklin is not a shareholder of Penn National Gaming Inc. but has owned shares in the past.

Copyright © 2009 Horse Racing Business

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