Penn National Still Fighting Competition in Regional Gaming Market

The new Penn National Gaming (NASDAQ: PENN  ) has issued its first quarterly results since spinning off its real estate assets to Gaming and Leisure Properties (NASDAQ: GLPI  ) , and results show continued challenges in the U.S. market.

Quarterly revenue fell 13% to $644.7 million, primarily because Hollywood Casino Perryville in Maryland and Hollywood Casino Baton Rouge in Louisiana are now part of GLPI, and EBITDA was down 1.3% to $150.3 million. It's tough to use these as direct comparisons because the spinoff occurred at midquarter, so take the numbers with a grain of salt.  

We did get a picture of what the new structure of these two companies will do to operations and EBITDA going forward. For 2014, management expects Penn National revenue to be $2.6 billion, rent paid to GLPI to be $421.6 million, and EBITDA to hit $280.3 million.

That means that with a $929 million market cap and $754.5 million in net debt, the company's enterprise value is just six times expected EBITDA. That's a very reasonable value, even with the general decline in the U.S. gaming market, but it'll take growth at existing resorts to be a big win for investors.

That top-line growth will be tough, especially with new resorts opening across the country and better competition from Pinnacle Entertainment, which acquired Ameristar Casinos last year. Even Penn is expanding via construction projects in Missouri, Ohio, and California. The company is contributing to the supply problem that is sinking regional gaming. 

The transformation of Penn National is complete
Now that Penn National and its real estate side GLPI are separate, it'll be a little easier to evaluate each company. Penn has become a gaming and entertainment pure play without the need for as much capital to fund expansion. On the downside, that means it's also leveraged to the U.S. gaming market and doesn't have the same assets to fall back on in hard times that other companies possess.

The big question is whether the U.S. gaming market grows enough to absorb added supply. Operational improvements only go so far, so look for top-line growth in 2014, otherwise this company will be a value trap for investors chasing an increasingly competitive gaming market in the U.S.

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