Tuesday, October 28, 2008

No Fortress Here

“Your guess is probably as good as ours.”
—Peter Carlino, CEO Penn National Gaming, on the near-term outlook

Earnings season is underway—the chief reason for the paucity of updates here at NotMakingThisUp—and the conference calls are bleaker than any we have ever heard.

While we usually like to present highlights from the best and the worst of the quarterly calls here on these virtual pages, there are so few “best” and so many “worst” that it would be piling on.

But the most concise summary of the state of the world came from Penn Gaming, a racetrack and casino operator that may well go down as the poster child of the excesses of the liquidity bubble.

On June 15, 2007—just a week before the Blackstone IPO, which itself marked the absolute top of the credit cycle, in our view—Penn was the subject of a $67 a share, $8.5 billion buyout by the unfortunately named Fortress Investment Group, along with Centerbridge Capital.

That deal, of course, fell apart a year later, and the buyout group, despite the $1.5 billion termination fee, are probably glad it did: last trade in Penn Gaming was $13.35 a share.

The reason for the deal falling apart and the recent price of Penn shares is obvious. As Penn’s chief operation officer, Tim Wilmott, said on yesterday’s call, “September was probably the worst month I have ever seen in my 20-plus years in the industry. October has been a little better, but still not good, more like July and August.”

As for the future outlook, Penn management declined to give one.

“Your guess,” CEO Peter Carlino said at the top of the call, “is probably as good as ours about where this is all going as one looks at the economy and the things that affect our business.”

As for Penn’s stock price, and the prospects of further share repurchases, Penn’s CFO would say “we do find the price is compelling and interesting,” but declined to commit to the kind of share buyback Wall Street’s Finest are always pushing for on these calls.

After all, Penn paid $27.54 a share in the just-finished quarter to buy back a little over a million shares.

At $13.35 a share, or roughly 20% of the aforementioned $67 all-cash deal price, one would think those shares would appear much more than just “interesting.”

But with almost $3 billion of debt on the books prior to receipt of the termination fee—no fortress of a balance sheet there—management sounded frozen.

As have most management teams we’ve heard thus far.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


kizz said...

i would love to see a list of buyback casualties...one that comes to mind is URI. after cerberus terminated its LBO arrangement, the company levered up and bought back 27mm shares at $22/share for $600mm. Today's level...$7.57/share.

Jonathon Kowalski said...

How do you keep up with all of these earnings/analyst calls? Have you found any easy way to download audio streams to an ipod?


Lyon Jewett said...

Is this the "blood in the streets" time to buy Warren talks so affectionately about? Or just a long the "slouching towards Gomorrah"?

Mark said...

Sadly, the timing of those Fortress guys was less than perfect in an even MORE important way:

It was February of '07 when they let the public get in on their really good thing via the opportunity to buy shares in their IPO...

The stock actually held up pretty damn well all the way (a full 90 days!) through May of '07...

Before collapsing terribly, just ONE month before the end of the insiders' 120-day (yes, you heard that right, 120-day, not six-month) lock-ups...

I spent about twenty minutes trying to come up with a moral for this sad story, but even more sadly, I couldn't... Any suggestions?

Anonymous said...
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Anonymous said...

Two quick comments Jeff: A) I don't think there's a "fortress" in any of the gaming stocks. It's not just PENN which has a horrid balance sheet, but just look at Las Vegas Sands, WYNN, MGM...the whole gaming sector's a mess! B) I think, gievn Blackstone's price decline since it's IPO, you'd think they were the poster child of the credit market mess.

That's my two cents and I could be wrong...