Penn National Gaming Inc. (PENN) recently made headlines with their deal to buy the Maryland Heights Harrah's casino from Caesars Entertainment (CZR) for about 610 million dollars. The Saint Louis casino market generates slightly over one billion dollars of revenue yearly and can be seen as a stable city for casinos to thrive in despite stagnant economic growth across the United States. Currently, the state of Missouri has a cap of 13 casino licenses and for companies that want to compete in the casino industry in Missouri the only way to do this is to buy a casino.
Penn National Gaming is a regional owner and operator of casinos and racetracks properties across the United States with 26 facilities spread across 20 states including one casino in Las Vegas. Prior to Penn National Gaming purchasing Harrah's Maryland Heights, MO from Caesars Entertainment, Penn National Gaming's only casino near the Saint Louis area was the Argosy Alton, IL facility located about thirty minutes from downtown Saint Louis.
For those not familiar with the Saint Louis casino market, there are currently six casinos in or around Saint Louis and the casinos are evenly spread out across each geographical area of Saint Louis. The geographical areas of the Saint Louis casino market are Saint Louis and Saint Louis County. In the city of Saint Louis there is the Lumiere Place Casino owned by Pinnacle Entertainment (PNK) and right over the border is the Casino Queen in East Saint Louis, Illinois. Outside the city of Saint Louis is Saint Louis County and this is broken up into north, south and west Saint Louis County. North of Saint Louis is the Argosy Casino owned by Penn National Gaming, south of Saint Louis is River City Casino owned by Pinnacle Entertainment and west of Saint Louis is Ameristar (ASCA) and Harrah's.
Out of the six casinos in the Saint Louis area Harrah's and Ameristar are the biggest players in terms of market share in the area. Prior to Penn National Gaming acquiring Harrah's in Maryland Heights, MO the Argosy was continually losing market share and over the last two months the Argosy saw revenue fall around 9.2% compared to the same months last year. Overall Penn National Gaming hasn't been able to gain market share in the Saint Louis area over the last couple of years, but if Penn National Gaming plays their cards right they could be the new leader in the Saint Louis Casino market and could see further price appreciation in their stock for the following reasons.
1) Pinnacle Entertainment has two casinos operating in the Saint Louis area and I believe Penn National Gaming has had time to analyze how two properties owned by the same company in the same regional area can help the company save money and grow be able to grow the brand.
2) The former Harrah's is located in Maryland Heights, Missouri which is west of Saint Louis and when looking at the demographics of the Saint Louis area West County and Saint Charles County (right next to Maryland Heights) have more high income residents than other parts of Saint Louis.
3) Right next to the Harrah's property is the Verizon Wireless Amphitheatre and other small attractions that can add a nice boost when major attractions take place.
4) I have visited the Maryland Heights Harrah's many times and while it's a nice property, the property overall is dated and in my opinion stuck in the 1990's. Harrah's has made some improvements over the years, but their hotel, food and beverage units are below the quality one would receive at Lumiere Place, River City and Ameristar due to significant investments these companies have made in their properties over the years.
5) Penn National Gaming has stated that after the sale goes through that they will re-brand the casino into its "Hollywood Brand" and when something new comes to the market this will give Penn National Gaming the opportunity to get market share from other competitors.
6) The Midwest segment accounts for 35.7% of Penn National Gaming property EBITDA. The addition of Harrah's can significantly contribute to a higher percentage of EBITDA and get closer to the East/West regions 48.8% of property EBITDA.
When taking a look at Penn National Gaming outside their recent acquisition the company has been outperforming the S&P 500 and is still positive for the month of May being up over 2% Lately, with the decline of the markets the bigger casinos with overseas exposures have taken some big hits downward. Wynn Resorts (WYNN) is down 13.7% over the last 30 days, MGM Resorts International (MGM) is down 19.8% over the last 30 days and Las Vegas Sands (LVS) is down 17.2 over the last 30 days. The "sell in May and go away" effect is currently proving to be correct and even with broad based sell off Penn National Gaming is up 9.6% over the last 30 days.
When investing in a regional casino one way to take a look at the regional casino sector is where geographically the properties are located. About half of Penn National Gaming properties are located in the Midwest and are in states that have stable economies. With Penn National Gaming's Harrah's property located in Maryland Heights, Missouri the average list price for a home is $136,541 and the town right next to Harrah's; Saint Charles, MO has an average list price of $229,225. Some of Saint Louis and vicinity major employers include A.G. Edwards, Anheuser-Busch, Boeing and Washington University.
In conclusion, with the recent bullish price action and an exciting acquisition Penn National Gaming is poised to continue to outperform despite the bearish conditions the market has been seeing lately. For investors looking to add or start a position in Penn National Gaming I would look at the 50 day moving average (around $44) as a starting point. While the Saint Louis casino market may not be as exciting as Las Vegas, if Penn National Gaming can successfully re-brand to old Harrah's they will go from last to first in Saint Louis casino market share very quickly.
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