Penn National Gaming, Inc's (NASDAQ:PENN) plan to spinoff real estate to Gaming and Leisure Properties (NASDAQ:GLPI) and put more operational leverage on the company's finances is paying off in 2016, as strong growth has resulted in a sharp rise in earnings. Thursday morning the company released first quarter results, and there was a lot for investors to like.
The gaming industry is back in Middle America
First quarter net revenue jumped 13.9% to $756.5 million, and adjusted EBITDA, which is a proxy for cash flow from a resort, increased 15.5% to $212.9 million. But given the leverage Penn National has to the bottom line, net income jumped from just $1.9 million a year ago to $23.7 million.
To be fair, results were helped tremendously by the acquisition of Plainridge Park Casino in Maryland, Tropicana Las Vegas, and Prairie State Gaming in Illinois. But improvement in the gaming market was so widespread that it can't be attributed to acquisitions alone.
Regional gaming is back
What's particularly encouraging about Penn National's results was the breadth of growth. West region revenue jumped 39.9% to $87.6 million, driven by the acquisition of Tropicana Las Vegas. The resort isn't running at full steam yet, so EBITDA in the region increased just 11.9% to $20.1 million -- but that's by far the company's smallest region.
East/Midwest net revenues jumped 13.2% to $437.5 million, and EBITDA was up 15.7% to $134.8 million, primarily from organic growth at existing casinos.
Southern Plains results showed a similar trend, with revenue up 7.1% to $225.2 million and EBITDA up 6.7% to $77.7 million.
Once Tropicana Las Vegas starts to generate more cash after remodeling the hotel, updating slots, and opening a day club, the West region should start to grow as well. And there's another addition coming.
Another expansion on the horizon
The next project that will open this summer is Jamul Indian Village east of San Diego. It's not a property the company owns, but Penn National will get 30% of the resort's pre-tax revenue, a licensing fee of 1.5% of gross gaming revenue, and interest on the funds advanced to the $390 million project.
This will further push the company's reach west, and should be a low-risk addition to the income statement.
Is the expansion of regional gaming finally over?
There are two major drivers of improving results for Penn National Gaming. The first is the general improvement in the economy, which gives players a little extra money to spend on gambling, hotels, and other expenses at the company.
The other driver is a slowdown of expansion in regional gaming in general. The trend over the last decade has been for states to open up gaming to new competitors, which Penn National has taken advantage of -- but this dilutes the market that already exists, and hurts a lot of companies along the way. Slowly, we're seeing the pace of new projects slow, and that's leading to more consistent results for Penn National Gaming.
With the spinoff of Gaming and Leisure Properties, investors can also see some of the resulting leverage the company has on the bottom line. The company is now growing net income rapidly, and second quarter guidance is for net income to grow from $3.0 million a year ago to $25.1 million. That's welcome news for investors, and the trend should continue as long as the economy keeps rolling along.