Penn National Gaming's Reduced Transparency in Third-Quarter Results Is a Red Flag for Investors

Penn National Gaming PENN reported third-quarter results that met our expectations and consensus estimates, and management revised upward its outlook for 2011. Management also indicated that that it expected earnings to be flat in 2012, due to cannibalization of existing properties by new Penn casinos and increased competition, which led to a more than 5% decrease in the stock. As our financial model already assumed flat earnings around $2.32 per share in 2012 due to cannibalization and increased competition, our fair value estimate of $37 remains unchanged. We currently view Penn as fairly valued and would not be buyers of the stock due to our negative outlook for increased competition to lead to a decline in sales at a number of Penn's existing properties.