Penn National Gaming, Inc (NASDAQ:PENN) has been known by investors as the best casino stock available for many years. However, not as many investors are as optimistic today as they were in the past, which is evidenced by the relatively large 10.20% short position.
We’ll take a look at why Penn National Gaming, Inc (NASDAQ:PENN) has developed such a strong reputation through the years, as well as why shorts are in attack mode.
Penn National is different
Most casino companies carry enormous debt loads. While Penn National owns its fair share of long-term debt at $2.63 billion, that’s nothing compared to some peers. It also isn’t enough debt to dissuade the company from expanding. Actually, Penn National is aggressively looking to add locations throughout the United States.
Currently, it owns and operates 29 facilities across 18 states (and Ontario). This broad geographic diversification is what separates it from other players in the industry. Most casino companies rely heavily on Las Vegas visitors for revenue. Penn National doesn’t have to fret about Las Vegas traffic numbers. Rather, Penn National Gaming, Inc (NASDAQ:PENN)’s strategy is to simply build casinos where demand is high and supply is low.
Penn National desperately wanted to win a location in Springfield, Massachusetts, but it lost the vote. Instead of giving up, Penn National opted for Tewksbury, which is north of Boston and off Interstate 495. Penn National aims to spend more than $200 million on the property. Of course, having a location near Boston has enormous potential, and if done correctly, it has the potential to steal enormous market share from nearby Connecticut casinos, Mohegan Sun and Foxwoods.
Another example of Penn National Gaming, Inc (NASDAQ:PENN)’s location strategy is Mahoning Township, which is in Western Pennsylvania, only 60 miles north of Pittsburgh. This location might not have as much potential as Tewksbury, because Pittsburgh is more of a blue-collar town with a lower average income than Boston, but for Penn National, it’s simply a matter of building a presence near as many big cities as possible. Penn National aims to spend $225 million on the Mahoning Township property.
Yet another location Penn National would like to add to its portfolio is San Diego. Penn National Gaming, Inc (NASDAQ:PENN) will really dig into its pockets for this one and aims to spend $360 million. Considering the many high-income consumers as well as nearby competition, this kind of investment might be necessary. Expectations here will be much higher than in most areas. While San Diego could be a big boon for the company, it should be noted that many local residents strictly oppose this plan and are fighting against it.
Looking back, Penn National has opened six casinos over the past five years. As you can see from the information above, Penn National doesn’t plan on slowing down. And with more states looking for revenue streams, Penn National’s growth potential seems high.
On the other hand…
A company that is opening locations opposed to closing them often indicates strength. But it’s possible that Penn National Gaming, Inc (NASDAQ:PENN) is moving too far too fast. The biggest concern is the health of the consumer. While there will always be the die-hard gambler (a nice way of referring to a degenerate gambler), most gamblers are of the casual variety. In other words, they go to gamble at casinos as a form of entertainment every once in a while, or while on vacation.
The consumer is up against it at the moment, with increased payroll taxes, declining wages, spiking oil prices, and steadily increasing mortgage rates. It’s difficult to imagine a scenario where the consumer will somehow become healthier over the next several years. While stock and real estate investments are performing well, the average consumer doesn’t have those kinds of investments.