Penn National Gaming Is Still Undervalued With the Spinoff Behind it

Penn National Gaming (NASDAQ: PENN  ) released it's quarterly earnings and forward guidance recently, and the market punished the stock due to the negative news. Even with the poor short-term news, compared to Ceasars Entertainment Corporation (NASDAQ: CZR  ) and Las Vegas Sands (NYSE: LVS  )  Penn's shares remain dramatically undervalued.

Earnings guidance
On April 24, Penn issued a press release announcing its financial results for the prior three months. This release also provided forward guidance for its income statement for the 2014 fiscal year.

 

2014 Revised Guidance

2014 Prior Guidance

Net revenues

$2,513 million

$2,625.40 million

Adjusted EBITDAR

$674 million

$701.9 million

Rental expense

$-418.1 million

$-421.6 million

Adjusted EBITDA

$256.2 million

$280.3 million

Other expenses

$-245.8 million

$-258.4 million

Net income

$10.4 million

$21.9 million

     

Diluted EPS

$0.12 million

$0.24 million

Source: SEC 3/24/14 8K

The company revised it's guidance downward for net revenue and net income by $112 million and $11.5 million, respectively. With these revisions, diluted EPS is expected to be $0.12. While this is not good news, Penn shares still look cheap, especially as the market punished the stock after the announcement.

Enterprise multiple
As discussed in my previous Penn article, valuating the stock using the enterprise multiple approach is better than using a P/E multiple, primarily because it is difficult to know what Penn will earn in the long-term, as many states have just begun legalizing gambling. An enterprise multiple valuation highlights the value of Penn relative to it's peers, and benchmarks by using its debt and equity outstanding.

Enterprise multiple is enterprise value (EV) / earnings before interest, taxes, depreciation, and amortization (EBITDA). The enterprise multiple relates a firm's takeover cost to its earnings potential. As such, it serves as a proxy of how long it would take for the company to pay its entire value back.

Penn Enterprise Value

 

Average Diluted Shares

88.68 million

Market Price

$11.11

Market Cap

$985.22 million

Bank Debt

$748.78 million

Notes

$296.68 million

Cash

$292.99 million

Enterprise Value

$1.737 billion

   

2013 EBITDA

$695 million

2014 Estimated EBITDA

$256 million

   

2013 Enterprise Multiple

 2.50

2014 Estimate ent Multiple

 6.79

Source: SEC 10K and 8K

EV reflects the market value of an entire company. To calculate EV, add up the capital structure, then subtract its cash. Penn has $749 million in bank debt outstanding, $296 million in senior notes and convertible preferred shares, which were included in the market cap for simplicity. After adding these with market capitalization and subtracting the $293 million in cash, EV comes out to $1.73 billion.

Penn's 2013 EBITDA was $695 million. It's 2014 revised estimated EBITDA is $256 million. The decrease is due to the $422 million rent expense paid to Gaming and Leisure Properties under the terms of the master lease occurring from the recent

Penn's revised expected 2014 enterprise multiple is 6.79, which means it can earn back its entire value in approximately 6.72 years. Competitors such as Caesars and Las Vegas Sands have enterprise multiple's of 13.35 and 16.32 respectively.

 

Caesars

Las Vegas Sands

Enterprise Value

 $23.5 billion

 $72.77 billion

EBITDA

 $1.76 billion

 $4.46 billion

Enterprise Multiple

13.35

16.32

Source: Yahoo finance

The difference in enterprise multiple between Penn and it's two competitors is mind-blowing. Currently Caesars is unable to cover it's interest payments, and has approximately $27 billion in liabilities. If Caesars does go under, shareholders will likely loose everything in bankruptcy court. It is shocking that Caesars, which has serious solvency issues, is granted an enterprise multiple of more than two times that of Penn.

Foolish Takeaway
The market was not happy when the decrease in forward guidance was released for Penn. Foolish investors should also be upset, but should keep a level-head to the short-term news, especially since the stock trades at a great price relative to peers. With an enterprise multiple of less than 1/2 of Caesars, Penn National is a buy.

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