An interesting thing happened to Penn National (PENN) and Pinnacle (PNK) after they released fourth quarter financial results.
Both companies missed analyst earnings estimates, and both stocks rose in response.
On the surface, that doesn’t compute. That is especially true of PENN, which not only missed, but issued a dour forecast for the year.
At PNK, on the other hand, CEO Anthony Sanfilippo and his fellow executives exuded bullishness.
And, in fact, PNK had strong numbers, especially improving margins, EBITDA, and a projection that it would generate more than the forecast $40 million in synergies from its merger with Ameristar.
The reasons for the bounces were, at least partly, psychological.
Regional casino companies have gotten hit so badly in recent months that their financial results, while short of consensus estimates, were better than many feared they really would turn out to be.
Indeed, one reaction to PENN’s outlook is that the company set expectations very low and will almost assuredly beat them.
And beating expectations often is the name of the game for short-term stock moves.
Indeed, several analysts immediately responded by saying the results at both companies were better than they had expected.
In addition, there was the belief—or at least hope—that regional casino companies have seen the worst of it and business is bound to get better from here.
So, there is a tug-of-war among bulls and bears for these two companies.
For PENN, the bulls see strong free cash flow and a very low valuation at six times enterprise value to EBITDA. In addition, they see growth coming in new projects—two more Ohio racinos, the Jamul Indian casino in California, perhaps a slots casino in Massachusetts and a full casino in Philadelphia.
The bears see a company whose casinos have underperformed even weak regional gaming trends and that continues to face competition. Further, while Jamul appears to be a done deal, local residents have forced delay of that San Diego County casino for more than a decade, and they haven’t given up.
For PNK, the bulls see transformational benefits of the Ameristar purchase—the synergies, a stronger network of properties to cross market, soaring EBITDA, free cash flow yields above 20 percent. Further, the company is executing, they say, pointing to margin improvements in the fourth quarter despite lower revenues.
PNK also has its own growth story, they note, pointing to the opening of an all-slots racino in Cincinnati later this year, River City near St. Louis now offering complete amenities including a hotel, a hotel rising in New Orleans, and the continued ramp up of L’Auberge Baton Rouge.
Bears point to the now old bugaboos of weak regional gaming trends and increasing competition, with the next shot taken by L’Auberge Baton Rouge when Golden Nugget opens next door near year-end.
However, even in that instance, the bulls have an argument, saying that Golden Nugget will make the two properties into a more powerful draw for Texans and actually complement each other.
So, there you go, a bull-bear tug-of-war on the two largest pure regional gaming plays in the U.S.
