Penn National Gaming Inc. (NASDAQ:PENN) continues to take over the regional gaming space, both through its industry-leading operations and transformative acquisitions. Its recently released fourth-quarter results showed further growth, although it didn't translate to as much bottom-line improvement as management would have liked.
What the quarter looked like
Revenue was up 3.5% to $769.0 million as each of the company's regions showed growth. But adjusted EBITDA after master lease payments fell 19.5% to $68.8 million, well below its guidance of $91.7 million. Management said stock compensation of $10.6 million and transaction costs of $5.1 million related to the Pinnacle buyout took a toll on earnings.
While results were mixed for the quarter, revenue did grow consistently across the country. In the Northeast, revenue was up 1.5% to $383.7 million; in the South/West region, revenue was up 12% to $151.5 million; and in the Midwest, revenue rose 3.3% to $222.3 million.
The shadow over Penn National's results
Earnings are important, but currently, investors are more interested in the $2.8 billion acquisition of Pinnacle Entertainment that was announced in mid-December. The deal will create a regional powerhouse with 41 resorts in 20 locales across the country, more reach geographically than any U.S. operator, and second only to Caesars Entertainment in its number of casinos. That much consolidation will reduce competition among regional gaming companies, and allow Penn National to expand its margins.
Adjusted EBITDA margin for Penn National was 26.8% in the fourth quarter. I would expect that figure to rise consistently after the acquisition closes. In Macau, the leading operators consistently have EBITDA margins over 30%, so that's a target it could conceivably hit.
Why Penn National is riskier than ever
Regional gaming used to be a battle between a handful of players, but now three former leaders, Ameristar, Pinnacle, and Penn National, will be under one roof -- which gives it considerable muscle in the market.
However, what investors should keep in mind is that Penn National will be riskier than ever as an investment. Gaming & Leisure Properties owns most of the company's real estate, and Penn National's operating company has $972.3 million of net debt on top of a $2.51 billion market cap. Based on 2017 EBITDA after master lease payments of $390.5 million, the company's enterprise-value-to-EBITDA ratio is 8.9. That's not a crazy multiple by traditional standards, but it holds no real estate to fall back on if times get tough.
If Penn National continues to grow, the stock will have a lot of leverage, but if revenue and earnings fall due to a recession or something else out of management's control, the stock could plunge.