Investor Concerns About Penn National Debt In Volatile EnvironmentWednesday, 27th May 2020
In an industry facing extreme stock market volatility due to the effect of COVID-19, Penn National Gaming is beating the odds. Should the level of Penn National debt cause investors, and players, to be concerned?
Penn National Volatility
As part of its first-quarter earnings call on May 7, Penn National announced it had $2.89 billion in debt. Later that day, the company’s stock skyrocketed.
In fact, at a time when most gaming company stocks are crashing, Penn keeps heading the other way. On May 6, its stock was at 16.56 per share. By May 23, that price climbed to 30.38. It’s almost completely back to the yearly high of 38.17, reached on Feb. 20.
But what is driving the stock hike? It can’t be any national economic environment, because other casino groups haven’t seen the same results. It also can’t be due to the success of online gaming during COVID-19. Unlike other major casino groups, Penn’s app isn’t operational yet.
Coupling the massive Penn National debt with no online presence, what’s driving Penn’s success? The answer comes from some traditional sources and strategic business decisions.
Penn Casino Doors Reopen Down South
If you want a casino company’s stock price to rise, those doors need to be open. Thanks to negotiations in Louisiana and Mississippi, that’s just what happened last week.
On May 18, Penn reopened its five casinos in Louisiana. Three days later on May 21, the company did the same in Mississippi. It’s not just the prospect of seeing gamblers walk into a random casino. These two states are a second home for the Pennsylvania-based corporation, accounting for more than 25 percent of its portfolio. This decision built up confidence in the brand overall.
Penn Casino’s New Normal
As part of the reopening, Penn announced detailed changes it would be making to casinos in the two states. First, seating will be limited at table games and slot machines. Live music and entertainment will remain suspended, while regular drawings and special events will be limited. Finally, the company plans to install floor decals and signage to help reinforce social distancing rules.
The stock market responded with a spike, both to the reopening and the promise made afterward by Penn’s CEO Jay Snowden.
“We are continuing to work closely with our regulators and state and local leaders to prepare for the eventual reopening of all of our properties nationwide,” Snowden said in a statement to media. “I want to thank the team at Penn who has worked tirelessly over the last several weeks to prepare for this process.”
Communication Breeds Confidence
The statement did two things. First, it reassured stockholders more casinos would reopen soon. Second, it let people know there was a plan in place, that Penn had been working towards this.
It’s a key point many gaming companies ignore right now. Investors and gamblers both need to know this shutdown won’t last forever, that there is a plan being worked on, even if they’re not being told details. Most companies instead choose the ‘no comment’ route to their detriment.
Corporate Decisions Keep Penn Strong
A second reason Penn is still going strong comes from changes they made beyond the casino floor. The company headed into March in a strong position.
Stock prices hit a yearly high of 38.17 in February. January and February were both very profitable for Penn. The company performed well ahead of expectations in every segment, with store sales growth at 6 percent. Earnings before interest and taxes (EBIT) grew 15 percent over the same period in 2019.
Sports Betting And Leasing Deals
Speaking to investors in the May earnings call, Penn Chief Financial Officer Dave Williams said this was driven by the mild winter weather and the introduction of retail sports betting at multiple properties. Having that extra revenue helped beyond the ability to make payroll, as they used it not just to cover Penn National debt, but also for a real estate restructuring.
At multiple locations, they sold their real estate to other companies, while entering into lease deals. As of May, Penn had rent credits of $337.5 million and was able to get out from under the state and federal property taxes. Their decision to rent, not buy, provided more financial security.
Other Mitigation Measures To See Them Through
They also made changes in other areas, reaching out to state and local governments where they have casinos. After negotiation, most of these governments provided help in the form of deferred license fees, property tax abatements, and regulatory expense relief.
“Our aggressive mitigation measures allowed us to finish March with $730.7 million cash on the balance sheet,” Williams told investors on the May 7 earnings call. “While we are hopeful the majority of our properties will resume on some level of operations by the end of May or early June, if all properties remain closed through the end of the year, our monthly cash burn will be approximately $83 million, including rent credits.”
Penn sacrificed real estate ownership and negotiated deals in order to maintain revenue. That’s something other companies have tried but were less successful. As it stands on May 23, even with the shutdown, the company expects properties will break even on revenue before taxes. But what about the future?
Banking On Barstool For The Future
For that, Penn is looking to their Barstool project. The majority of the debt mentioned earlier was spent in a variety of ways on this project. A Barstool Sports betting app is in development for launch in the third quarter of this year, as are Barstool sportsbooks, set up in each of the company’s casinos.
Barstool brings a potentially massive new audience to Penn, with 60 million followers on social media. The project isn’t cheap. The rebrand of the sportsbooks alone will cost between $8 to $10 million, Snowden told investors on the earnings call.
“We believe the Barstool brand and marketing engine should help drive meaningful market share as the project is introduced,” Snowden said. “We’re well-positioned and should see a significant benefit as states begin to open casinos.”
For a company with a large debt load, Penn seems like the strongest bet to rebound once the quarantine is over. In fact, you could argue that the rebound already started.