Stock Analysis: Pinnacle Entertainment

| About: Pinnacle Entertainment, (PNK)

Summary

Pinnacle Entertainment is trading at its 52-week high. Here's what you should know.

Over the next five years, analysts expect Pinnacle Entertainment's earnings to grow at an average annual rate of 10.24%.

Forward P/E multiple of 42.12x, compared to the industry average of 18.0x.

Catalysts: Continued strong execution of operating and financial strategy.

Pinnacle's implied share price is $21.52, which is a 19% premium to the current price of $18.11. The most likely implied value is between $19.6 and $22.3 based on DCF.

Pinnacle Entertainment Inc (NYSE:PNK) is a U.S.-based company that owns and operates 16 gaming properties in Ohio, Colorado, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, and Pennsylvania. It also holds interest in racing license owner and management contract for Retama Park Racetrack. In the last fiscal year, the company recorded $2378.9 million in net revenue, with EBITDAR of $654.5 million (margin of 28%). It has grown its revenue at a 3-year CAGR of 3.73% and has maintained EBITDAR margins of 28% the entire time.

On September 9, 2016 Pinnacle Entertainment acquired the operations of the Meadows Racetrack and Casino From Gaming & Leisure Properties. Its market cap is approximately $1.1 billion, and its Enterprise Value is $4.93 billion.

Q4 2016 performance: The company recorded $637.4 million in net revenue (14.1% year over year), with EBITDAR of $169.7 million (margin of 27%).

Revenue Sources

The company has three reporting segments: Midwest, South, and West. Pinnacle Entertainment generate its revenues through gaming, lodging, retail, food, and beverage operations.

1. Midwest Segment Analysis:

In last fiscal year, the Midwest segment contributed 57% to the company's total revenue. The segment recorded $1359.9 million in net revenue (7.5% year over year) with EBITDAR of $402.4 million (margin of 29.6%). The table above shows that most of Midwest revenues come from gaming.

2. South Segment Analysis:

The South segment contributed 33% to the company's total revenue.The segment recorded $777.1 million in net revenue (-2.0% year over year) with EBITDAR of $246.1 million (margin of 31.7%). The table above shows that 90% revenues come from gaming and remaining from lodging, retail, food, and beverage operations.

3. West Segment Analysis:

The West segment contributed 10% to the company's total revenue.The segment recorded $236.0 million in net revenue (4.1% year over year) with EBITDAR of $88.4 million (margin of 37.5%). The table above shows that 83% revenues come from gaming and remaining from lodging, retail, food, and beverage operations.

Peer Performance

Source : Google Finance

Investors who took positions in Pinnacle Entertainment stock 1 year ago would have earned a solid return of 73.5% on their investments by March 21 and have risen 25% since the beginning of the year. During the same period, the NASDAQ earned 17.35% in capital gains. Among Pinnacle Entertainment competitors and peers, Monarch Casino & Resort (NASDAQ:MCRI) returns of 44.07% have been stellar as well. Boyd Gaming Corporation (NYSE:BYD) and Penn National Gaming (NASDAQ:PENN) down from a year ago.

EPS & PE Ratio Summary

Source : Nasdaq.com

The results surpassed analysts' expectations in Q4 2016 and expecting $0.16 for Q1 2017E. Analysts are expecting Pinnacle Entertainment to post EPS of $0.43 in 2017. That represents a rise of 123.61% from negative $1.80 in 2016. Over the next five years, the analysts expecting Pinnacle Entertainment's earnings to grow at an average annual rate of 10.24%.

Source : Nasdaq.com

Pinnacle Entertainment was trading at a forward PE multiple of 42.12x, compared to the industry average of 18.0x. Its competitors Monarch Casino & Resort, Boyd Gaming Corporation and Penn National Gaming have forward PE multiples of 20.0x, 21.6x, and 46.1x, respectively.

Financial Strategy Progress

Carlos Ruisanchez, President and Chief Financial Officer of Pinnacle Entertainment, said:

Pinnacle's fourth quarter represents continued strong execution of our operating and financial strategy. We continue to focus on prudent capital allocation, while we pursue growth and value enhancing opportunities. We have made progress on our commitment to reducing leverage and Conventional Debt outstanding, as our conventional leverage is now approximately 3.3x.

Debt to Equity Ratio:

Source: Morningstar.com

Companies with high debt-to-equity ratio reflects that the company has been aggressively financing its growth with debt. This could negatively impact earnings as a result of the additional interest expense. For capital-intensive industries, a debt-to-equity ratio of 2x can be treated as normal.

The table above shows that Pinnacle Entertainment had a high debt-to-equity ratio over the past years. For 2016, debt-to-equity ratio for Pinnacle Entertainment was not meaningful since its equity value was negative (conventional leverage is now approximately 3.3x). Its peers Monarch Casino & Resort and Boyd Gaming Corporation had debt-to-equity ratios of 0.11x and 3.42x, respectively.

Capital Expenditure:

Pinnacle Entertainment has incurred capital expenditure of $109 million in 2015 and $98 in 2016.In 2017, the Company anticipates capital expenditure to be between approximately $100 million and $110 million. Its capital expenditures strategy includes anticipates capital expenditure related to maintenance, capital expenditures on existing operating assets, businesses and corporate initiatives.

Valuation Analysis

Investors should look at valuation methodologies when deciding whether to enter or exit a stock. Valuation is driven by perceived growth, risks and investors' willingness to pay. There are various methods available to assess the valuation of a stock. We used the DCF analysis over a five-year period, with the following assumptions:

  1. Revenue was projected to be in line with the Street's expectations. Currently, analysts expect Pinnacle's to generate revenue of $2588 million in fiscal 2017 & $2634 million in fiscal 2018.
  2. Operating margin was in line with historical level
  3. D&A, capex and changes in WC were projected to be in line with historical levels.
  4. We used a baseline rate of 10% for WACC and a baseline terminal FCF growth rate of 1.0%

Here's the DCF analysis down to the unlevered FCF:

Pinnacle's implied share price is $21.52, which is a 19% premium to the current price of $18.11. The most likely implied value is between $19.6 and $22.3 per share based on this analysis.

Catalysts to increase its share price in the next six to 12 months include possible better-than-expected profits and strong execution of operating & financial strategy. Investment risk includes improper management of leverage ratio because high interest payment will impact the bottom line.

Analyst Recommendations

On March 21, 2017, Pinnacle's stock increased more than 73.5% over the last 12 months. Analysts' recommendations show a 12-month targeted price of $19.5 per share. Of the analysts covering Pinnacle Entertainment, 3 recommended it as a "Strong Buy" and 4 recommended it as an "Hold."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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