Gene Marcial's Stock Picks August 16, 2009, 8:15PM EST

Marcial: Penn National's Winning Hand

The gaming operator has a strong balance sheet, cash, and prudent management. Now it's looking for distressed properties, and could place a bet on Vegas

http://investing.businessweek.com/services/charts/chart.asp?sym=PENN&d=365&w=600&h=300

Penn National Gaming—52-week price

By Gene Marcial

BW's Gene Marcial

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Back in the summer of 2007, Penn National Gaming (PENN) welcomed a buyout offer of $8.9 billion, or 67 a share, from a group of private equity investors led by Fortress Investment (FIG) and Centerbridge Partners, only to see the deal capsize a year later in the wake of the financial crisis.

This time, however, Penn National, a major regional gaming operator that doesn't have operations in Las Vegas, is the one looking to do some buying. The company is scouting around to buy assets of troubled companies that have either filed for Chapter 11 protection or are in dire financial straits.

Some analysts believe Penn's next property acquisition could be in Las Vegas. They say that Penn's "trim, modest but efficient" way of managing gaming operations would serve it well in Las Vegas, where flamboyance and extravagance are part of the reasons why gaming companies on the Strip haven't fared well during the recession.

Penn Chairman and CEO Peter M. Carlino has recently told analysts on separate occasions that he is, indeed, on the prowl, looking to acquire distressed properties everywhere, including Las Vegas, at the right price. Analysts say Carlino has always acted in a "prudent fashion" in acquiring assets. And unlike other Vegas operators, he isn't looking to build pyramids, or replicas of major cities—he would more likely be acquiring assets or properties on the cheap from distressed gaming companies.

The pickings are plenty, according to analysts who have become more bullish on Penn, whose balance sheet and stable operating performance are getting good marks on Wall Street. Of the 16 Street analysts who track Penn, 13 recommend buying the stock and three recommend holding it, according to Bloomberg. Not one analyst tags the stock a sell.

healthy stock bounce

Penn's strong balance sheet "gives it the ammunition to take advantage of opportunities in this recessionary environment that others are not able to," says analyst Dennis Forst of KeyBanc Capital Markets (KEY), who rates the stock a buy. He notes that the economic downturn, which he says is already reflected in Penn's stock price, isn't materially affecting the company's results. (KeyBanc has done banking for Penn.) Forst says Penn deserves credit for its strong balance sheet, liquidity, and able management. Recent action in the shares may indicate that investors are taking notice of those factors. The stock, which tumbled to a 52-week low of 11.82 a share on Oct. 24, 2008, has since bounced, climbing to 31 a share by Aug. 14.

Analyst Brian McGill of investment firm Janney Montgomery Scott, who rates the stock a buy, agrees that Penn's strong balance sheet puts it in an enviable position to search for acquisitions from distressed sellers. Penn is apt to find properties at prices near the bottom of the current cycle, including some in Las Vegas, according to McGill. (Janney expects to do banking for Penn.)

"We do think Penn would be willing to consider a Las Vegas Strip acquisition at the right price," says McGill. A purchase would enable Penn's EBITDA (earnings before interest, taxes, depreciation, and amortization) to grow to more than $1 billion, which he figures would make Penn one of the largest and most diversified gaming companies.