Penn National shares win while most casino stocks suffer

Markets haven't been easy on shares of the big casino operators, but the regional gambling stocks do have at least one big winner.

Guests playing a slot machine at the Plainridge Park Casino in Massachusetts.
John Tlumacki | The Boston Globe | Getty Images

Penn National Gaming shares are up 70 percent over the past 12 months and 35 percent year to date. By comparison, shares of MGM Resorts, Las Vegas Sands and Wynn Resorts—the major Las Vegas casino operators hurt by the slowdown in Macau's gambling business—are all down sharply in the same period. Stock of Caesars Entertainment also is lower, and its operating entity is currently in bankruptcy.

Last week Penn National, which operates in 16 states and in Canada's Ontario Province, obtained preliminary approval from the Nevada Gaming Control Board for its $360 million acquisition of Tropicana Las Vegas—the company's first property on the Vegas Strip. The company also is building a Hollywood-branded Indian casino in the San Diego area. In June, Penn National opened Plainridge Park Casino, a $250 million facility about 35 miles southwest of Boston.

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"I joked with people a year ago no one wanted to be in regional gaming and everyone wanted to be in Macau," Penn National President and CEO Tim Wilmott said in an interview this week. "And a year later, it has really flipped."

We're not in Atlantic City, which continues to suffer because of the proliferation of gaming in all the neighboring states around New Jersey. But beyond that, I think the regional markets right now are as healthy as they've been in the last three or four years.
Tim Wilmott
CEO, Penn National Gaming

Among other regional operators, Boyd Gaming's stock is up about 70 percent in the past 12 months, propelled in part by speculation it could be the next gaming company in a REIT transaction. That follows gaming REIT Gaming and Leisure Properties agreeing to buy Pinnacle Entertainment's real estate assets.

One exception to the generally upbeat regional market trends is Atlantic City, New Jersey, but Penn National is clear of the area.

"We're not in Atlantic City, which continues to suffer because of the proliferation of gaming in all the neighboring states around New Jersey," said Wilmott. "But beyond that, I think the regional markets right now are as healthy as they've been in the last three or four years."

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Penn National has bet on an ambitious expansion into new markets such as the Las Vegas Strip and Southern California. The company also recently acquired a major video gaming terminal operator in the Midwest that some analysts see as a "hedge" to Penn National's exposure to the traditional casino market and potentially as a new growth platform.

The company expects the Tropicana Las Vegas Casino Hotel Resort deal to close before the end of the third quarter. The Nevada Gaming Commission is expected to rule on the transaction Aug. 20. The Tropicana purchase is the company's largest acquisition since it bought M Resort, located about 10 miles from the Las Vegas Strip, in 2011 in a deal valued at $231 million. Penn National tried unsuccessfully to buy the unfinished Fountainebleau location in 2010 but lost to billionaire Carl Icahn.

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Wilmott said the Wyomissing, Pennsylvania-based company is on track to open its "Hollywood Casino Jamul" in San Diego in mid-2016. The $360 million casino, a project with the Jamul Indian Village, will be located around 19 miles east of downtown San Diego. The company's opening of the Plainridge Park Casino in Plainville, Massachusetts marked that state's first gambling facility.

"The opportunities for new jurisdictional growth are somewhat limited," he said. "We are looking at different ways to grow our business, and most recently we made an acquisition to purchase a slot route operator in Illinois."

Penn National recently acquired privately held Prairie State Gaming, the largest video gaming terminal (VGT) operator in Illinois. Stifel analyst Steven Wieczynski wrote in a research note after the deal was announced on July 31 that "the proliferation of VGTs has taken a bite out of commercial casino operators' profits."

Barclays gaming analyst Felicia Hendrix wrote in a recent note that Penn National's Prairie State Gaming acquisition "allows the company to hedge its exposure to the brick-and-mortar casino business in Illinois" and adds that it "establishes a new growth platform which would help further diversify PENN's operations."

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According to Wilmott, there have been more than 20,000 machines added in Illinois just in the last three years that have been authorized to go into bars, taverns, fraternal organizations and truck stops. "This also is legal in Nevada, Louisiana and in West Virginia, and could potentially be legalized in a number of other states in the next three or four years. So we got involved and purchased this slot route operator to give us a platform to grow."

Penn National also has its eye on international markets.

"We continue to look at international opportunities," he said. "We realize in the evolution of Penn National we'll have to grow beyond the North American footprint that we have today. When the right opportunity comes in Europe, Asia, South America or wherever, we want to be prepared to grow our business beyond the U.S."

That said, the CEO cautioned that "nothing is imminent" on the international front.