Penn National Rides on Top-Line Growth Despite Competition

Penn National Gaming, Inc. PENN is known for its consistent business strategies and strong brand recognition. Through various acquisition and divestitures, the company’s presence has become widespread.

Even though a competitive operating environment and weather-related headwinds continue to hurt this casino giant, revenue-boosting and cost-saving initiatives are expected to reap recurring benefits over the years.

In the third quarter of 2018, the company posted lower-than-expected earnings. In fact, in the trailing four quarters, Penn National recorded an average miss of 23.3%. Moreover, earnings estimates for the current year have declined 44.3% over the past year, reflecting analysts’ worries about the company’s future earnings potential.

Subsequently, shares of Penn National have lost 26.2% over the past year compared with the industry’s collective decline of 30.6%.

Nonetheless, continual top-line growth and margin expansion efforts posit the company for growth in the upcoming quarters.

Top Line Gains on Continual Acquisition

Penn National is known for its acquisition strategies that help it expand presence as well as improve revenue yields. In 2017, the company entered an agreement to acquire Pinnacle Entertainment, Inc., a leading regional gaming operator. This transaction closed on October 15. Post the transaction, the company is welcoming 12 new properties. It expects to realize synergies worth $100 million from its Pinnacle acquisition. Meanwhile, the company’s top line is also consistently favored by these mergers.

Additionally, Penn National derives its revenue stream from a number of sources. Given its geographical widespread, gaming revenues increased 3.3% year over year in 2017 and 4.4% in 2016. Further, the food, beverage, hotel and other segment’s revenues increased 4.6% and 18.5% year over year in 2017 and 2016, respectively. Subsequently, the company’s net revenues also grew 3.7% and 6.9%, respectively, in both years.

For 2018, the company expects revenues of $3.58 billion, up 13.8% year over year. Moreover, the consensus estimate projects revenues to grow by 13.5% in 2018 compared with that of 2017.

Margin Enhancement Efforts Aid

During 2017, Penn National engaged with third-party consultants to help the company validate and quantify a set of initiatives that are expected to improve its industry-leading property level operating margins in the coming years.

Through ongoing refinements in procurement, marketing and labor management, the company reported margin growth in the third quarter of 2018. In the reported quarter, adjusted EBITDA margins increased 115 basis points (bps) to 29.1%, with 17 of the 23 gaming operations posting improved margins. For 2018, it expects adjusted EBITDA of $1.94 billion.

Concerns

Penn National is continuously facing intense competition from various casinos like Wynn Resorts WYNN, Las Vegas Sands LVS and MGM Resorts MGM, video lottery, gaming at taverns and other internet wagering services. Not only gaming services but any form of leisure and entertainment activities — including shopping, athletic events, television and movies, concerts, and travel — also put the company under competitive pressure. Its operations, therefore, are facing heightened competition, with new entries in the already high-supply market.

Further, since Penn National’s operations are widespread, weather-related downturns affect its revenues and profitability. Having most of its properties located by waterbodies, the company is vulnerable to flood and other natural disasters. In fact, its operating results somewhat were in a lower-than-expected range due to weather-related hassles.

Penn National currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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