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Penn National's Shares Decline 35% in a Year: Can it Rebound?

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Penn National Gaming, Inc. (PENN - Free Report) is known for its consistent business strategies and strong brand recognition. Through various acquisition and divestitures, the company’s presence has become widespread.

However, stiff competition and fluctuations in Macau gaming revenues have been hurting the company as well as its peers like Las Vegas Sands (LVS - Free Report) , MGM Resorts (MGM - Free Report) and Wynn Resorts (WYNN - Free Report) .

A tough operating environment in Macau weighed on casino stocks from June 2014 to most part of 2016. In fact, the crackdown on corruption in China compelled Macau officials to impose restrictions on high rollers to stop billions of dollars from being siphoned off illegally from mainland China to Macau. As a result, footfall declined at the local casinos, leading to a persistent decrease in gaming revenues.

Given this scenario, the Gaming industry has lost 27.2% over the past year. Penn National’s shares have declined 35.3% in the said time.


Let us find out factors that impact the company’s profitability.

Acquisition Facilitates Top-Line Growth

Penn National is known for its acquisition strategies that help the company expand its presence as well as improve revenue yields. In 2017, it entered an agreement to acquire Pinnacle Entertainment, Inc., a leading regional gaming operator. This transaction closed on Oct 15. Post the transaction, the company is welcoming 12 new properties. It expects to realize synergies worth $100 million from its Pinnacle acquisition. Post Pinnacle acquisition, the company completed acquiring the operations of Margaritaville Resort Casino in Bossier City, LA.

We believe that these acquisitions aid the company’s revenue yield. Given its geographical widespread, gaming revenues increased 3.3% year over year in fiscal 2017 and 4.4% in fiscal 2016. For fiscal 2018, the company expected revenues of $3.58 billion, up 13.8% year over year. Given the 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.

Concerns

In 2018, casino operators in Macau were impacted by the slowdown in China, and the trade war between Beijing and Washington. The trend is likely to continue in 2019 as well. Further, speculations over another crackdown on capital outflows by China kept investors on the edge. Flagging China property price impacted the high-end VIP segment.

Meanwhile, owing to weakness in Illinois and Mississippi jurisdictions, Penn National is facing marred earnings. The company is also facing intense competition from various casinos, video lottery, gaming at taverns and other internet wagering services. Not only gaming services but also any form of leisure and entertainment activities — including shopping, athletic events, television and movies, concerts, and travel — put the company under competitive pressure. Its operations, therefore, are facing heightened competition, with new entries in the already high-supply market.

Penn National currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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