Check Out These Regional Casinos
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While the giant multi-billion dollar casinos in Macau, Singapore, and Las Vegas get all the attention because of their glamour, the regional casino players have a steady clientele and cater to the day tripper. As the U.S. economy has been recovering, locals are returning to their favorite casinos. In some respects, the regional players also benefit as it remains cheaper to visit a local or regional casino rather than make a trip to Vegas.
These two regional players are merging
Pinnacle Entertainment (NYSE: PNK) is in the process of finalizing the purchase of Ameristar Casinos (NASDAQ: ASCA). The companies announced that they are divesting a planned project in Louisiana to help gain regulatory approval for their merger. The combination of the two companies would include 17 gaming properties with more than 5,000 hotel rooms, 23,500 slot machines, 640 table games, and more than 16,000 employees.
In a report from Stifel Nicolaus Capital Markets, analyst Steven Wieczynski said of the deal:
Given the limited overlap of properties between Pinnacle and Ameristar, on paper, this deal makes total sense. With regional gaming markets coming under pressure given additional competition, coupled with the number of the U.S. declining, we believe it makes total sense for certain regional gaming operators to team up in order to eliminate duplicate costs, especially on the promotional and marketing side.
Pinnacle CEO Anthony Sanfilippo said that the combined companies will save at least $40 million annually. The combined companies will have debt of around $3.7 billion. The focus, after the merger is completed, will be on paying down debt and deriving cost synergies.
The biggest regional player
Penn National Gaming (NASDAQ: PENN) is one of the largest regional gaming companies with over $3 billion in revenue. Penn National operates 29 gaming and racing facilities with a focus on slot machine entertainment. In total, the company operates approximately 34,500 gaming machines, 850 table games, 2,900 hotel rooms, and 1.6 million square feet of gaming floor space.
Shares of Penn National have been under pressure this month as it reported weak second-quarter results. Competition and bad weather kept customers away from its casinos during the quarter. Penn National faced heavy competition in Ohio, where Caesar's Entertainment opened a new casino and offered discounts to players. Penn National posted a net loss in the quarter of $12.2 million compared to a profit of $66.7 million last year.
Going forward, Penn National plans to split into two publicly traded entities. One company will own the casinos while the other will manage them. According to an analyst report from J.P. Morgan, the firm sees the deal enhancing the company's ability to distribute its significant free cash flow in a tax efficient manner, enhance longer-term growth opportunities, and lower its cost of capital.
More than just the Kentucky Derby
Churchill Downs (NASDAQ: CHDN) has expanded into gaming from its namesake racetrack in Kentucky. The company now has operations in seven states and an online wagering business. Churchill Downs owns two racetracks, three casinos, three racinos, a video poker business, a poker media and brand company, and a network of off-track betting (OTB) facilities.
Churchill Downs continues to expand beyond its horse racing business. Currently, the company gets about 40% of its revenue from racing, 30% from gaming, and the balance from online and other businesses. The company just completed its acquisition of the Oxford Casino in Maine for $160 million. CEO Robert Evans said of the deal:
The acquisition of Oxford continues our focus on investing capital in gaming-friendly states, in newer properties, in what we believe are competitively defensible markets, and at valuations that we believe will result in significant future free cash flow generation at rates of return attractive to our shareholders.
Churchill Downs is also expanding seating capacity at its namesake track in Kentucky. Last year, the company sold out its new 300-seat Mansion addition at the racetrack. Those seats went for over $7,000 each at this year's Kentucky Derby. Now the company has filed plans to add a two-story facility on two acres near the starting point and the homestretch of the race. In addition to seating, plans call for betting windows and machines, a food court, a bar, and a VIP area. This follows the company's goal of getting more profit out of its most high profile days and weeks. EBITDA at this year's race increased $6.5 million over last year.
Investors no longer have to go to Vegas to find a casino for their portfolio. Of the three, Churchill Downs is my favorite. The company is consistently profitable and has only $189 million in debt. Penn National looks to be an interesting play by breaking up into two companies. The value unlocked from the spin-off will benefit shareholders. Lastly, Pinnacle Entertainment is making a strategic acquisition with Ameristar, but will need to turn its attention to paying down debt.
Once I see the company making strides in debt repayment, it will be time to make an investment for the long-term. Furthermore, the stock is up over 106% in the past year and now looks to be a good time to book some profits.
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