Penn National Q3 Earnings Miss, Q4 Outlook Lowered, But Casino Operator Debt Reduction Effort Remains Solid

Posted on: October 31, 2019, 08:39h. 

Last updated on: November 1, 2019, 08:47h.

Shares of Penn National Gaming (NASDAQ:PENN) were lower by 2.70% in early trading Thursday after the company’s third-quarter results missed Wall Street estimates. But some analysts are urging investors to focus on guidance for the current quarter and the regional operator’s ongoing efforts to reduce debt.

Penn National CEO Timothy Wilmott is looking to cut debt and Wall Street likes that idea.

For the period ending Sept. 30, Penn National earned 38 cents a share on revenue of $1.35 billion. Analysts were expecting earnings of 42 cents on turnover of $1.37 billion.

The operator of casinos under the Ameristar, Argosy, and Hollywood brands, said adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) surged by $81.9 million to $311.6 million in the September quarter. Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of $407.9 million missed company-issued guidance of $408.8 million due to competitive factors in the Northeast.

Our quarterly Adjusted EBITDAR of $407.9 million was slightly off our guidance of $408.8 million due to a greater-than-expected impact from a new competitor in the Northeast. However, we did manage to offset much of that impact by strong performances from our West and South segments,” said Penn National CEO Timothy Wilmott in a statement.

He’s likely referencing Wynn Resorts’ Encore Boston Harbor, which opened in late June. Penn National runs the slots-only Plainridge Park Casino (PPC) in Massachusetts, putting it in competition with the state’s newest gaming venue.

Mixed Fourth-Quarter Guidance

Wilmott noted the company affirmed its fourth-quarter EBITDAR outlook, but slightly reduced its revenue outlook for the current period. Penn National expects adjusted EBITDAR of $394.5 million on revenue of $1.35 billion for the current quarter, up from $323.9 million on turnover of $1.15 billion a year earlier.

The Northeast region, which includes the aforementioned PPC, Detroit’s Greektown Casino and several Ohio locations, among others, is expected to drive nearly $629 million in fourth-quarter revenue.

While Penn National’s results and guidance were mixed, analysts remain enthusiastic about the company’s cost-cutting plans related to its acquisition of Pinnacle Gaming and its effort to reduce debt.

“The company reiterated its PNK-related cost and revenue synergy targets of $120M and $15M to $20M, with the former expected to be realized by CYE20 and the latter targeted for full implementation in 2020-21,” said Stifel analyst Steven Wieczynski in a note out Thursday.

The analyst noted Penn National paid down $97 million in liabilities in the prior quarter and remains on pace to reduce its leverage ratio to 5x by end of next year.

Restoring Order

Shares of the regional gaming company have been volatile for much of this year, slumping through the first eight months of 2019, only to rally in September. The September gains, however, mostly evaporated by the end of the month. But Penn National stock has been on fire this month, soaring 19.53 percent.

Wieczynski believes the company’s fourth-quarter outlook should “restore a sense of calm,” while noting short sellers that have flocked to the shares may be proven wrong.

“Additionally, we did not identify anything in the release supportive of the short thesis that has come into vogue of late, an outcome that should result in the gradual unwinding of the current elevated short interest in the name,” said the Stifel analyst, who reiterated a “buy” rating on the stock.

About 10 percent of Penn National’s shares outstanding are currently loaned to short sellers, meaning that if the stock rises, those bearish traders will buy to cover those positions, further boosting the stock in the process.