Fitch says Pinnacle more prepared than Penn National for coming casino storm

TAGs: fitch ratings, penn national gaming, Pinnacle Entertainment

penn-national-sanfilippo-pinnacle-wilmottAnalysts at Fitch Ratings are leery about the future of regional casino operators in the United States but believe some operators are better prepared to weather the coming storm. Fitch believes the combination of market saturation, an aging customer base and expected reductions in Social Security payments will take its toll on regional casino operators. Supply has more than met regional demand; Fitch says one-third of Ohio’s casino revenue came at a direct cost to gaming operations in neighboring states.

Among regional operators, Fitch suggested Pinnacle Entertainment was best positioned to roll with the punches thanks to its “strong free cash flow.” (Check an alternate view by our own Rafi Farber.) Pinnacle’s Q2 report card showed revenue up 108% year-on-year to $555.2m. However, stripping aside the impact of the eight properties acquired via last year’s $2.8b acquisition of Ameristar Casinos, Pinnacle’s quarterly revenue would have fallen 2.6% ($14.4m). Regardless, Pinnacle trimmed its quarterly loss to $2.3m, down from $5.1m in the same period last year.

Believing the company was “capable of much better,” Pinnacle CEO Anthony Sanfilippo (pictured on the right) said the Q2 numbers “do not reflect our best effort.” Sanfilippo noted that quarterly earnings had been cut by $4.5m thanks to the company rolling out its mychoice player loyalty program at its new properties, but Sanfilippo said the program is already having “an encouraging effect” on operating metrics. Sanfilippo said the integration of the Ameristar properties has resulted in $58m in annual savings to the end of Q2.

In contrast to Pinnacle, Fitch suggests Penn National Gaming’s fixed-cost structure had left it “more vulnerable in more severe scenarios” for long-term same-store revenue decline. Despite market softness, Penn has continued to expand, counting five projects currently under development in four states, including two racetrack casinos in Ohio, a hotel for its New Mexico racetrack casino, the $225m Plainridge Park slots parlor in Massachusetts and a $360m Hollywood Casino-branded Indian gaming joint east of San Diego scheduled to open in 2016.

But as Penn gets bigger, its revenue is getting smaller. Penn’s Q2 revenues fell 14% year-on-year to $652.1m. However, a continued focus on cost-cutting resulted in a net profit of $2.8m, far more preferable than the $12.2m loss in the same period last year. Penn CEO Timothy Wilmott (pictured on the left) said his company had benefitted from “a somewhat more stable operating environment,” although he admitted that “competitive pressures” were continuing to weigh on its core East/Midwest segment, where revenue was off 16%.

Referencing Penn’s Massachusetts project, Wilmott claims not to be bothered by the fact that voters will have a chance to repeal the state’s casino legislation in November. Wilmott says current polls show that voters “recognize the importance of the gaming act” and the “substantial economic and employment benefits” casinos like his will bring to Massachusetts.


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