Interested in placing a bet on the gaming industry? Morgan Stanley analyst Mark Strawn believes Penn National Gaming (Nasdaq:PENN), along with Las Vegas Sands (NYSE:LVS), are the two best bets to beat analyst expectations in the first quarter. According to Strawn, Penn National Gaming's same-store gaming revenues in February were up 5%, well ahead of his own estimate of 1%. Business is good for the Pennsylvania-based gaming company and all signs point to it getting even better.
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It has three casinos coming online in 2012. The first is the Hollywood Casino at Kansas Speedway, a 50/50 joint venture with International Speedway Corporation (Nasdaq:ISCA), owners of the Kansas Speedway. Opened on February 3, the 95,000 square-foot casino generated $6.8 million in revenue in the first nine days it was open. As the only fully authorized table games and slot machine facility in the Kansas City area, its $155 million investment will pay big dividends for the company. Farther to the East, Penn National Gaming is opening two of the four authorized casinos in Ohio. On May 29, it will open the 125,000 square-foot Hollywood Casino in Toledo and then sometime in November, it will open the 150,000 square-foot Hollywood Casino in Columbus. Built at a cost of $720 million, the two casinos provide Ohioans with an additional 5,000 slot machines and 130 table games. For the company it means a 22.6% increase in the amount of square footage of its casinos.
This past year was its most profitable in its history. All three of its major operating segments reported increased operating profits year over year. The biggest improvement came from the Midwest segment, which went from a $40 million operating loss in 2010 to a profit of $211 million. Focusing on generating higher quality earnings and not just top line gains, the fourth quarter delivered the fourth consecutive quarter of margin improvements year over year. Its full-year adjusted EBITDA margin rose 280 basis points to 26.6%. Once its two land-based Ohio casinos are up and running and gaining acceptance, in my opinion you can expect them to add somewhere in the neighborhood of $615 million in additional revenue and $158 million in operating profits annually. Its future profitability appears promising.
Probably the most remarkable thing about the company is the consistency of its stock. In the past decade, its stock's had a negative total return just once and that was in 2008 when it lost 64% of its value. However, resorts and casinos as a whole lost 82% that year, so even then it was performing better than its peers. Up 11% year to date as of April 10, it's working on its fourth consecutive year of positive returns since 2008. Over the past 10 years it's averaged an annualized total return of 16.44%, 420 basis points higher than its peer group and almost 1,300 basis points better than the S&P 500. If volatility is something you can't handle, this is a perfect stock for balancing risk to reward.
The Bottom Line
Penn National Gaming allocates capital better than most of its peers. Its total debt is 2.8 times EBITDA compared to 6.9 times for its peer group. It's very conservative in how it uses debt and I like that a lot. Even more compelling is how it spends its free cash on share repurchases. Most companies pay too much for their shares; it doesn't. In 2008, it repurchased almost nine million shares at an average price of $17.05. That was just 29% of its 2008 high of $59.79. Wynn Resorts (Nasdaq:WYNN) repurchased $940 million of its stock in 2008 at an average price of $86.12, 69% of its $124.77 high that year. MGM (NYSE:MGM) bought back $1.2 billion of its stock at an average price of $68.36, 67% of its 2008 high of $102.50. Penn did a much better job repurchasing its shares.
Penn National Gaming's respect for shareholders is clearly evident. In my mind, that makes it the perfect stock to own.