Station sets revenue records, Penn less fortunate

Having quietly broken ground on $750 million Durango Station, proud papa Station Casinos announced that despite “some headwinds,” the company had achieved record-level cash flow in 4Q21. “The government’s mask mandate across the state of Nevada remained in place and we definitely felt the effects, along with increased inflationary pressure on ordinary goods and services,” said CFO Stephen Cootey of the aforementioned headwinds. Fortunately for Station, customer spend per visit was up, as was time expended playing the slots. As for rooms and F&B, it was the most profitable fourth quarter in Station history. Older customers continued to stay away but 21-to-25-year-olds more than made up for them, playing in greater numbers (60%) than in 2019.

Durango Station is about a year and a half to two years from completion but Cootey was bullish: “The project is located in the fastest-growing area of the Las Vegas Valley with a very favorable demographic profile. It’s a five-minute drive to approximately 125,000 people and no unrestricted gaming competitors within a five-mile radius of the project site.” The company accordingly expects an annual ROI in the neighborhood of 15%. Cootey spoke more vaguely of other casino projects—as many as eight—across the valley and concretely of its North Fork Rancheria of Mono Indians project in California, which has surmounted all legal hurdles save one. So there was no cause for managerial complaint. “In general, we think the 4Q21 provided further confidence in [Station’s] ability to control operating expenses and sustain margin gains,” Deutsche Bank analyst Carlo Santarelli seconded. “We reaffirm our Buy rating and believe [Station] should be a relative outperformer amongst the regional gaming centric names over the near to medium term.

Truist Securities analyst Barry Jonas noted that Station’s $190 million cash flow was 5% ahead of Wall Street‘s expectation and that the $422 million in revenue was 3% higher than consensus forecasts. “Omicron’s impact has continued into Q1, though it appears to be improving. We tweak our model to assume some impact into early Q1 offset by pent-up demand,” he added. As for Station’s three closed casinos, the carrying cost is minimal—$2 million—while $650 million is rolling in from the Palms sale, now consummated. In addition to the Durango project, Station is budgeting $75 million-$100 million in maintenance reinvestment for this year. It closed out 2021 with $2.9 billion in debt and $275 million cash in hand.

(While we’re on the subject of Station, its not-exactly-new ad campaign was belatedly noticed by slow-on-the-draw Michael Shulman, who went into a swoon at the feet of company execs. Our favorite Station slogan is “Staying here.” Considering the company’s negligible expansion prospects since fleeing Missouri with regulators nipping at their heels, “Nowhere to go” might be even better.)

Omicron also played hob with Penn National Gaming‘s 4Q21 numbers, much more so than Station’s. Penn missed Wall Street’s cash-flow forecast, coming in under at $511.5 million. Company execs spun the news by promising better EBITDA from the current quarter. Penn stock has taken a battering in the past year, which may explain why management rolled out a $750 million share-repurchase plan. Other good news was a narrower projected loss for Penn Interactive this year, down to $50 million from $80 million. Credit Suisse analyst Ben Chaiken took this to mean the unit would be “meaningfully profitable” next year, which is apparently the corner waiting to be turned by online sports betting. The profits may be short-lived, as big bucks will be plowed into buying out the rest of Barstool Sports, of which Penn currently holds 36%. Chaiken pegged the cost around $390 million. At present, he estimates Barstool to be throwing off $150 million in revenue and $50 million in cash flow, so you can see why Penn thinks it’s worth the toss.

Revenue ($1.6 billion) was nothing to complain about, with cash-flow margins in the high double-digits, even in the somewhat anemic—but 75% up from last year—West sector. Business was best in the Northeast, which raked in $656.5 million. When all was said and done, Penn recorded a profit of $45 million. Management predicted better days ahead, namely $6 billion to $6.4 billion in 2022 net revenue. Totting up all the expenditures facing Penn, including the Barstool buyout, Santarelli clucked disapprovingly that the share buyout was not the best use of cash. Point taken. He dismissed the earnings release as a “sideshow,” summarizing his outlook as “Feels like a lot of running in place to stand still.”

He elaborated, “it is becoming increasingly hard to continue to ignore the question of what will happen when PENN completes the acquisition of Barstool, in its entirety in the 1Q23, as it pertains to the licensing of certain personalities [read: Dave Portnoy], a question which we don’t believe has an easy/straightforward answer, at present. Based on the call commentary, it would appear that PENN plans to, in a way, restructure the roles of some personalities, to perhaps, minimize their influence, in the eyes of regulators, though it appears a lot is left to be determined.”

Competitors will not be happy that Penn “remains very promotional,” increasing market pressures. “The fact that this is happening in a buoyant [gross gaming revenue] environment in regional gaming is curious, in our view,” Santarelli opined. He also faulted the company’s revenue forecasts, which assume that it remains flat this year and—despite economic headwinds—into the next. He acidly concluded that Internet gambling and OSB would, best case scenario, represent just 15% of Penn’s cash flow and “Why this remains the sole focal point of the discussion around the Company, we do not know.”

Indeed, Chaiken issued a follow-up with the headline “Moving the ball down the field.” He dismissed the question of licensing issues and lowered his estimate of the cost of a Barstool buyout to $388 million. While offering little new, Chaiken made the bull case for Penn: “We imagine there is also some conservatism built into the guide for new competition (Lake Charles, East Chicago, Council Bluffs). We believe the launch of OSB/iGaming in Ontario (April 4) could prove to be a meaningful catalyst for PENN, given current poor sentiment for the interactive segment.” Yes, Wall Street really is fixated on OSB to the exclusion of almost everything else where Penn is concerned.

Jonas came riding to Portnoy’s defense after Business Insider ran another unflattering piece on the sports-betting provocateur. Truist Securities commissioned a Portnoy poll and “Only 51% of our respondents were familiar with him, and of those 65% either strongly or mildly like Mr. Portnoy (only 10% strongly or mildly dislike). In addition, 53% of participants said their view of Portnoy/Barstool would not affect whether they use PENN’s Barstool Sportsbook (vs. 25% said it would and 17% said maybe).” An overwhelming number of Barstool Sportsbook users (83%) like Portnoy and 8%, surprisingly, can’t stand him but patronize Barstool anyway, which makes as much sense as a liberal Democrat booking a stay at Trump International. Concluded Jonas, “We believe the Barstool database/media presence could drive higher market share for PENN once the marketwide promotional environment becomes more rational.”

Of more material import, the second half of last year saw Penn’s OSB generate $1.4 billion in handle and $99 million in revenue. Internet gambling, by contrast, brought in $52 million. In a little-noted (except by Jonas) development, Penn’s 3C cashless/contactless gambling solution is live in all Pennsylvania and Ohio properties, and has 30,000 users to date. Promo-happy Penn, interestingly, described the current promotional environment as “rational.” At brick-and-mortar casinos (remember those?) “January has seen increased visitation at a number of properties with a sustained level of higher value per trip.” Not surprisingly, business goes up as Covid-19 wanes.

To its credit, management didn’t over-hype the coming year, predicting that 1Q22 would outdo 2021, 2Q would be flat and 3Q would show some decline, year/year “given the high watermark gaming saw” and new competition entering the market. Finally, returning to OSB one more time, Penn is to be commended for not giving away the store. Management is returning 18%-30% of winnings to customers in the form of promotions, compared to the 64%-105% (!) of the average competitor, which makes the 2023 profitability target all the more plausible.

Santarelli was altogether more bullish on Boyd Gaming, which reported cash flow ($347 million) that was ahead of Wall Street’s consensus by $19 million, even after employee bonuses. While forecasting a flat 2022, top management felt confident enough to reinstate stock dividends. Having bought back $150 million in stock last November, Boyd is now committing to repurchasing $100 million every quarter. Boyd forecast property reinvestments that were greater than Wall Street expected, although Santarelli was skeptical: “We believe the regional operators are essentially backfilling maintenance spend from the pandemic period, and we also believe BYD’s maintenance likely proves to be a conservative estimate, with less spend than guided the likely result come year end.” The allocations include $95 million to redo Treasure Chest and $50 million to refresh Downtown‘s Fremont Hotel. The company also foresees big growth in Internet gambling, with revenue up to $30 million this year from $20 million in 2021.

Midwest- and South-regional casinos performed about as expected ($590 million), and Las Vegas locals came through with $236 million but Downtown outperformed expectations with $53.5 million, despite 14% more in operating expenses, mostly stemming from bringing Main Street Station back on line. Management downplayed the importance of OSB, despite reporting $24 million in cash flow from its FanDuel partnership. The duo just deployed five retial sites in Louisiana and are in live in five other states. The company minimizes its OSB risk by leasing its skins to partners in return for a cut of the revenues. Boyd continues to move ahead with its Stardust i-gaming branding, promoting it via social gaming in states where Internet casinos are not (yet) legal. Observed Santarelli, “Comically, and as a bit of an aside, we do enjoy the Stardust NJ commercials that feature a woman who ‘used to go to the casino’ and now enjoys playing from the comfort of her own living room.”

Truist’s Jonas also applauded the dividend reinstatement, adding some color of his own, including that the Downtown recovery was happening despite a still-emaciated Hawaii market but thanks to some “spillover” from Circa. Of Boyd’s 26 casinos, 27 reported double-digit cash-flow growth, with Sam’s Town Shreveport undoubtedly being the exception (because of a smoking ban). Boyd teased 1Q22 reportage by letting analysts in on a full January recovery from Omicron-softened business. It also predicted an improved labor market, which would enable it to support higher hotel occupancy. Midweek and convention business is also waxing. As for the Internet, “BYD sees a wider longer-term direct opportunity for the company in the iGaming market, which should complement its land-based portfolio as more states come online.” The company ended 4Q21 with $345 million cash in pocket and $3.2 billion in debt.

Before we leave, a few words about New York State online sports betting. Empire State punters wagered $1.6 billion in a truncated January (OSB went live on the 8th), with $449 million being wagered in the last week alone. After jumping out to an early lead, Caesars Sportsbook came back to the pack, behind FanDuel ($142 million handle for the week ending Jan. 30), with $128 million. DraftKings lagged at $102 million, as did BetMGM ($37.5 million) and BetRivers ($10 million). The real winner was Gov. Kathy Hochul (D), who booked $57.5 million in tax takings, far more than any operator is seeing in revenue. Indeed, operators had only $22 million from Week 4 to divvy up amongst themselves, thanks to really loose hold (5%). Reacted PlayUSA analyst Eric Ramsey, “Such a high tax rate could still lower the ceiling for New York’s sports betting market in the long term, but after three weeks of unprecedented volume, that seems like less of a concern.” WynnBet goes live this weekend, so we’ll see if that chums the waters for possible buyers of that unloved asset.

Quote of the Day: “Nice is different than good”—American composer and lyricist Stephen Sondheim.