Penn National Gaming, Inc. (PENN) is an extremely leveraged company with a shareholders’ deficit, or a negative net worth, meaning that at the end of 2017 its liabilities exceeded its assets by $73 million (down from close to $550 million in 2016).  Its current and long-term liabilities accounted for 91.2% of its total assets, yielding an onerous debt-to-equity ratio of about 9 to 1.  In addition, its planned-for 2018 acquisition of Pinnacle Entertainment is drawing unusually close scrutiny, over antitrust concerns, by the Federal Trade Commission.  On a positive note, PENN could benefit greatly if the U. S. Supreme Court–in an upcoming decision–enables more states to offer sports betting.


On March 1, 2018, PENN released its annual 10-K filing with the Securities & Exchange Commission.  PENN describes itself as “a leading, geographically diversified, multi‑jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment.”  As of December 31, 2017, it “operated twenty‑nine facilities in the following seventeen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, California, and Ontario.”

According to PENN’s 10K filing, nearly 86% of its net revenue is derived from gaming and the remainder comes from “management service fees from Casino Rama, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations.  Our racing revenue includes our share of pari‑mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off‑track wagering facilities.”

Net revenue was $3.147 billion in 2017 compared to $3.034 billion in 2016.  Net income was $474 million in 2017 and $109 million in 2016.  Diluted earning per share were $5.07 in 2017 and $1.19 in 2016.

PENN has the largest portfolio of racetracks of any company in the United States.  PENN fully or partially owns Charles Town Races, Dayton Raceway, Mahoning Valley Race Course, Penn National Race Course, Freehold Raceway, Plainridge Park, Sam Houston Race Park, Valley Race Park, Casino Bangor, and Zia Park.  In 2018, PENN intends to acquire the racetracks owned by Pinnacle Entertainment:   Retama Park, The Meadows, and Belterra Park.

On December 17, 2017, PENN entered into “an agreement to acquire Pinnacle Entertainment, Inc., a leading regional gaming operator.  This transaction, which is expected to close in the second half of 2018…is expected to add eleven more properties to our holdings and to provide greater operational scale and geographic diversity…Under the terms of the agreement, Pinnacle shareholders will receive $20.00 in cash and 0.42 shares of PENN common stock for each Pinnacle share.”  However, that this deal will actually go through is by no means a near certainty.

The Federal Trade Commission has issued a second request for information pertaining to the proposed acquisition under the Hart-Scott-Rodino Act, which indicates that the Commission may have antitrust concerns.  The Motley Fool wrote on March 25, 2018:  “As the FTC itself says, the vast majority of deals reviewed by the agency and the Justice Department are allowed to proceed after the first, preliminary review.  Of the 1,832 transactions reported to the agency in 2016 (the latest data available), only 54 deals, or 2.9%, resulted in a second request for information.  Nor does the FTC or Justice Department typically involve itself in the gaming industry.  Of the 26 deals reported over the last five years involving the amusement, gambling, and entertainment industry, not one drew a second request.”

PENN’s common stock trades on the Nasdaq Global Select at a price-to-earnings multiple of approximately 5 to 1, in contrast to the average for the exchange of 26 to 1.  PENN’s abnormally low P/E ratio reflects the amount of risk in the stock:  a company with a negative net worth and one overwhelmingly dependent on debt financing in a period of rising interest rates, which may have a deleterious effect on PENN’s profitability and possibly its ability to meet maturing debt obligations.

Copyright © 2018 Horse Racing Business

Full Disclosure:  The author of this analysis, William Shanklin, is not currently a PENN shareholder.