Majestic Research

Reuters

Penn National Shares Lower after Earns Miss

By Deena Beasley and Paritosh Bansal
Published: February 08, 2007

Investors sent shares of Penn National Gaming Inc. down more than 2.5 percent on Thursday after the U.S. racetrack and casino operator missed analysts’ fourth-quarter profit expectations.

The company’s failed bid for Harrah’s Entertainment Inc. was blamed in part for the four cents per share miss.

Penn National also warned of delays in two casino projects and forecast first-quarter and full-year profits below Wall Street’s estimates. Keybanc lowered its rating on the shares to hold from buy after the results were announced.

Net income in the fourth quarter increased to $87.4 million, or $1 per share, from $37.6 million, or 44 cents a share, a year earlier.

The results included 94 cents a share from insurance proceeds related to losses from Hurricane Katrina.

Excluding that gain and other items, Penn earned 32 cents per share, compared with the average analyst estimate of 36 cents a share, as compiled by Reuters Estimates.

Wyomissing, Pennsylvania-based Penn attributed the miss to its failed bid to acquire No. 1 gambling operator Harrah’s and increased depreciation for U.S. Gulf Coast assets.

Las Vegas-based Harrah’s agreed to a $17 billion takeover offer from private equity groups Apollo Management and Texas Pacific Group in December.

Penn Chairman and Chief Executive Peter Carlino said the company remains interested in mergers and acquisitions, but said “fundamental disciplines” remain and “we are not going to jump in if it doesn’t feel good.”

Majestic Research analyst Matthew Jacob said Penn, which does not have assets in the major gambling markets of Las Vegas and Atlantic City, New Jersey, is a likely buyer if the new owners of Harrah’s decide to divest some casinos.

Net revenue in the quarter rose 13.6 percent to $572.9 million, compared with the average Wall Street estimate of $571.1 million.

Penn said plans to expand its casino in Lawrenceburg, Indiana, have been constrained by environmental and archeological studies and the site’s parking facility will not open until the second quarter of 2008 and the expanded casino floor will open in the second quarter of 2009.

The company also said the opening of an expansion at its Charles Town casino in West Virginia has been postponed until May from the first quarter of 2007 due to construction delays and the budget for its Bangor, Maine, facility has been raised to $131 million from $90 million.

Looking ahead, Penn National said it expects to post net revenue of $599.5 million in the first quarter and $2.45 billion for full-year 2007. It forecast profit per share from continuing operations of 46 cents for the first quarter and $1.86 for the full year.

Analysts on average were expecting the company to forecast revenue of $619.4 million and profit of 56 cents for the first quarter, and revenue of $2.48 billion and profit of $2.13 for 2007.

Chief Financial Officer Bill Clifford attributed the gap to higher corporate expenses, increased insurance costs, property pre-opening expenses and a tax increase in Illinois.

Carlino said 2007 is “a transition year” as Penn prepares to open new properties in 2008.

“The guidance is bit soft on the bottom line, which coupled with the announcement of Lawrenceburg’s expansion schedule being moved out, should, we think, move the shares modestly lower in the near term,” CIBC World Markets analyst David Katz said in a research note.

He rates the stock as “sector outperformer,” and recommended that investors take an opportunistic approach to near-term weakness in the shares.

Penn’s shares were down $1.19, or 2.5 percent, at $46.28 in midday trade.