Penn National Riding On Mergers & Margin-Expansion Efforts
Zacks Investment Research | Jun 11, 2018 04:38AM ET
Penn National Gaming, Inc. (NASDAQ:PENN) , by virtue of being a preeminent gaming company in the United States, is known for its consistent business strategies and strong brand recognition. Through various acquisition and divestitures, the company’s presence has become largely widespread. Even then, Penn National is continuing to expand and leverage its brand power further.
Backed by its strong brand image, shares of the company have gained 52.5% in the past year, outperforming the industry ’s growth of 15%. Earnings estimates for the current quarter and year have also increased 8.9% and 4.7% over the past 60 days, reflecting analysts’ confidence in the future earnings potential of the company.
Moreover, per our VGM Score , which identifies the most attractive value, growth and momentum characteristics, Penn National has a score of B, reflecting the stock’s decent growth potential.
Continual Acquisition Drives Revenue Growth
Penn National is known for its acquisition strategies that help the company expand its presence as well as improve revenue yields. In 2017, the company entered into an agreement to acquire Pinnacle Entertainment, Inc. (NASDAQ:PNK) , a leading regional gaming operator. This transaction, which is expected to close in the second half of 2018, is likely to add 11 more properties to the casino giant’s current properties.
The company expects to realize synergies worth $100 million from the acquisition of Pinnacle. Meanwhile in Pennsylvania, the company acquired two category 4 licenses in the bidding process in the first quarter. Each license can have up to 750 slot machines and 40 table games.
Penn National derives its revenue stream from a number of sources. Given its geographical widespread, gaming revenues increased 3.3% year over year in 2017 and 4.4% in 2016. Also, food, beverage, hotel and other revenues increased 4.6% and 18.5% year over in 2017 and 2016, respectively.
Subsequently, the company’s net revenues also grew in 2017 and 2016. Additionally, in the first quarter of 2018, net revenues increased 5.1% from the year-ago quarter. Given increased demand for leisure services and the company’s enormous scale, we believe that the top line will continue to grow in the near term.
The Zacks Consensus Estimate for 2018 revenues is pegged at $3.2 billion, reflecting 2.9% growth from the year-ago quarter.
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Strategic Initiatives to Improve Margins
During 2017, Penn National engaged third party consultants to help the company validate and quantify a set of strategic initiatives that are expected to improve its industry-leading property level operating margins in the coming years. This effort encompasses both revenue and cost-saving initiatives that will reap recurring benefits over the years.
Through ongoing refinements in procurement, marketing and labor management, the company reported margin growth in the first quarter of 2018. In the first quarter, adjusted EBITDA margin increased 42 basis points (bps) to 29.7%, with 15 of the 23 gaming operations delivering improved margins. For 2018, the company expects adjusted EBITDA to increase more than 300%.
Moreover, net profit margin in the trailing 12 months is 17%, outperforming the industry’s average of 3.7%
Zacks Rank & Other Key Picks
Penn National sports a Zacks Rank #1 (Strong Buy). Other top-ranked stocks in the same space are Las Vegas Sands (NYSE:LVS) and Melco (NASDAQ:MLCO) , each carrying the same rank as Penn National. You can see the complete list of today’s Zacks #1 Rank stocks here .
Current-year earnings for Las Vegas Sands and Melco are projected to increase 21.4% and 44.6%, respectively.
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