Penn National Gaming came in from 3Q18 below Wall Street‘s expectations but JP Morgan analyst Joseph Greff defends the company, citing high expectations of free cash flow in 2019 (12%) and 2020 (20%), even after capex reinvestments. The addition of most of the Pinnacle Entertainment portfolio is expected to help as well. He blamed the third-quarter miss on aggravated promotional expenses in the Chicago area, Tunica and Plainridge. He likes Penn, in part, for “a relatively attractive regional gaming landscape marked by a stable consumer macro and a (mostly) rational promotional environment.” Penn execs are bullish, projecting $30 million of Pinnacle-related synergies by the end of the year. “Elsewhere, Ohio continues to be strong and Charles Town is seeing some momentum, with new customers in West Virginia from sports betting,” Greff wrote, adding that growth was stronger among rated high-end players than unrated, mass-market ones. The company said it was off to “a great start” on assimilating Pinnacle. I hope that doesn’t mean a blizzard of pink slips.
* Could Macao be headed into a second swoon in casino revenue? We’ve seen few direct signs of it so far. However, leading economic indicators like home buys and exports to the U.S. are down. Credit Suisse analyst Cameron McKnight writes that the trade war is “causing 64% of US firms operating in southern China to consider relocating manufacturing out of China.” In other words, hold onto your hat.
* Both McKnight and JP Morgan‘s Daniel Politzer buried the lead in their coverage of Caesars Entertainment. We’ll let Politzer tell it: “CZR announced that its CEO, Mark Frissora, will be leaving the company when his contract is up in February 2019. We expect this news will be received positively by investors, as Mark’s announced exit removes an uncertainty that had been of increasing focus for investors (and activists as well, we believe). While the formal search for a replacement has just begun, we expect the company likely has some candidates in mind (including current and former gaming executives), and will consider both internal and external candidates.” [We hope to God it’s not Gary Loveman.] We’re not sure why Frissora is leaving after such a brief tenure in the CEO’s chair, one that will be remembered for parking fees and buying Indiana racinos at above-market price. Considering the timing of Frissora’s departure, it makes it all the more unfortunate that Caesars rebuffed Tilman Fertitta‘s purchase offer: Now *there’s* someone with “the vision thing.”
Wall Street analysts agreed that the worst of 2018 is behind Caesars, even as the company ratcheted some of its guidance downward. The third quarter was dismissed as “more of a one-time, event-driven blip.” Cash flow and rents came in at $600 million, well shy of the Street’s expected $622 million. Clarity will be a little more difficult to achieve in the future, as Caesars will no longer provide forecasts of revenue per available room. As for regional markets, Centaur Gaming racinos were counted “a benefit” — maybe that high EBIDTA multiple was worth it — and Atlantic City was “a drag” even during high season. Centaur properties brought in $106 million and other regional markets were flat when they were expected to be down. In other good news, Total Rewards should be integrated into Centaur racinos this month.
Management said debt reduction was “an important priority at this time to de-risk the balance sheet and provide dry powder.” That dry-powder remark was interpreted by Politzer as a harbinger of further acquisitions. (Most likely Jack Entertainment, in our opinion.) McKnight was even more bullish on Caesars, which he described as “outperforming an extremely weak Las Vegas market.” He dismissed 3Q18 as “an outlier” and predicted 7% revenue growth in the fourth quarter. “CZR officially confirmed it rejected an offer from Tilman Fertitta, but we think interest in CZR remains high, and we expect further industry consolidation.” Like Feritta, though, McKnight thinks Caesars stock is worth $13/share. Those warm fuzzies from Wall Street must feel pretty nice.
* Scott Roeben has eight suggestions for what can be done to make Lucky Dragon Casino come back from the dead. Sample: 3-2 blackjack. After all, players will beat a path to your door if they can be assured of good paytables. In the meantime, Snow Covered Capital‘s desire for a $55 million sale price and Lucky Dragon’s record of epic failure will probably scare away prospective buyers, if any. Nor is original owner Andrew Fonfa out of the woods. There’s talk of a class-action suit by the 179 EB-5 investors who got left holding the bag, Lucky Dragon may be out of business but it’s a long shot from being out of the news.
