A $35 million bet pays off for Penn National
Today's Financial News - Posted November 4, 2009
The votes have been counted and gambling is coming to Ohio. That is fantastic news for Penn National (NYSE:PENN) shareholders. Even better for options players.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is easy to get political on a day like this, but I promised myself I would not do it. After all, yesterday’s election results speak for themselves.
While most pundits discuss the news from New York, Virginia and New Jersey, I’ve been pouring through the figures streaming out of Ohio’s polling places.
For Penn National (NYSE:PENN) investors, the news is fantastic.
Shares of the gambling-facility operator are up by nearly double digits today thanks to 53% of voters saying yes to Issue 3, a constitutional amendment that will allow gambling in four of the state’s largest cities.
Whether you are in favor of gambling or not, you cannot deny the fiscal boost it provides to local governments, especially when proceeds are hit with a 33% tax rate. For many failing state governments, gambling revenue is a last resort financial life ring.
Now that Columbus, Cleveland, Cincinnati and Toledo will open casinos, Ohio becomes the 39th state to welcome the industry. It is a fantastic trend for Penn National.
No gamble here
The company has steadily increased its revenues as states have revised their law books. As one of the few casino operators without a property in Las Vegas, Penn National has been largely shielded from the city’s devastating real estate and tourism bust.
Its stockpile of cash allows it to grow while its competitors fight to stay out of bankruptcy court.
Today, Penn announced it will have casinos built and operating in all four of Ohio’s gambling towns in just over 24 months.
The plans are proof that Penn’s own gamble, spending $35 million to help push voters to say yes, has paid off. With 47% of the vote saying nay, the odds were barely in its favor.
There are still eleven states left that have not yet legalized gambling. If you ask most industry experts, they agree it is just a matter of time.
Pennsylvania is the next key state. It already allows slots, but the state legislation is currently working on allowing table games. It is yet another revenue-generating opportunity for Penn that has the potential to send shares even higher.
Today’s price pop is no surprise to TFN Strategic Trader members. I recommended playing a set of the company’s call contracts back in September. The options have surged by 200% today. Nice!
Thanks to the news out of Ohio, playing Penn National is far from a gamble. This company has growth potential written all over.
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November 4th, 2009 at 7:04 am
Your analysis on the call contracts was good, but short term in nature, and incpomplete in the bigger picture.
Also, your reference to PENN’s comments with no quote source or attribution (although I think you are referring to Wilmott’s comments)appears to represent both a misunderstanding of the process to come, and irrational exhuberance with respect to PENN’s role in it.
First there is the isue of enabling legislation, which is required within 6 months, but as in Florida, there is no penalty constitutional provision or statutory penalty for failing to comply. Legislators with their own agenda have a tendency to follow their own schedule (see Pennsylvania) without regard to the wishes of the public, or the special interests who’s fortunes rely on them to act. The OH General Assembly has an interest in the VLT isssue, and they are subjec to certain timelines in order to be able to do anything about it.
The Governor; if he wre so inclined has an end around option as well if he decides to proceed through the OH Supreme Court and seek affirmation on his own constitutional authority to enact VLT operations through the OH Lottery Commission, she he seek to do so. I am not speculating that they would rule that he does, or does not, but this issue was not decided in the recent court case which challenged the authority of the legislature to enact the law that they did, rather than the authority of the Govenor to act unilaterally, which he did not; yet.
In addition, the Ohio Gaming Commission must be formed, staffed, and then licensing rules and regulations promulgated and adopted, before they can even entertain an application, or conduct a hearing. See Pennsylvania for an example of “moving at the speed of government” , but nobody is going to put a shovel in the ground without a license in their pocket.
In addition, this assumes that everything goes swimingly and each party is granted a license without delay for their locations upon request. Given the recent revelations about Dan Gilbert and his gambling arrest, conviction, and expungement (i.e. cover-up), there is no guaranty that a license will ever be issued to him. License have been denied in other jurisdictions for less.
Also, PENN does not have an ownership agreement for all four locations, but rather just two; Toledo and columbus. It has not yet been reported whether Gilbert would retain PENN to develop, and or manage his casinos, (he should), but any development agreement or management license would also be tied to a license, and unti one is issued, I don’t believe a spade of dirt will be overturned in the development effort.
In the absence of a development or management agreement, it is in PENN’s interest for Toledo; and especially Columbus to move forward, while Cincinatti in particular get delayed as long as possible due to the adverse impact to be occur at Argosy in Lawenceburg, which your short term call option investment anaysis does not appear to contemplate.
The 24 month time clock, as a result, would probably not even begin to tick, untilsuch time that a license has been granted, which could be as long as 12-18 months or longer away from today to begin with.
You also have not touched on the issue of the pending VLT matter in Ohio, and the impact of the pending litigation between Heartland Jockey Club, Ltd. (Beulah Park and Charlie Ruma) and PENN National. The outcome of bothe of these issues will have a serious impact on PENN in both Toledo and Columbus, and you should research these issues carefully to better undertsand how they may apply and come into play. The differential in projected revenues for Columbus, with vs, without VLT’s at Beulah, are almost $100,000,000, and it will make a big difference whether or not PENN owns Beulah or not as a result.
Take a look at the PENN message Board at http://www.investorvillage.com where I have tried to do my best to lay some of this out in greater detail.
For now, good luck going forward, and nice call on the options play; that is, if you followed your own advice.
November 4th, 2009 at 7:09 am
P.S. The $35,000,000 gamble cited is also incomplete, and th post election financial report filing deadline is December 11th, where the total cost will finally be known. The $35,000,000 campiang funding dd not come exclusively from PENN however, and if you scroll back to through the PENN messages I posted at IV, you’ll see an illustration of; and a link to the pre-election filing report, which breaks out the contribution funding levels between PENN and Gilbert.
November 4th, 2009 at 9:13 am
The adverse impact to Argosy/Hollywood at Lawrencburg has been projected by Indiana to be between 30%-38%. The effective tax rate for Argosy/Hollywood at Lawrenceburg is 43%, while the tax rate in Cincinnatti, OH will be 33%.