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Bricks and Mortar: Wager on Penn National

Editor's note: "Bricks and Mortar" is a new series of columns written by real estate reporter Nicholas Yulico and meant to help readers generate real-estate-related stock ideas.

Welcome to the second installment of Bricks and Mortar.

Today's column introduces a new addition to the mock portfolio -- Penn National Gaming (PENN), a company to own -- and provides updates on the stock picks featured in the first Bricks and Mortar installment.

Penn National (Own)

While it's getting harder to find a good deal among gaming stocks, Penn National remains a solid play with a rational valuation.

The company has no Las Vegas, Macau or Atlantic City exposure, but instead owns 16 riverboat casinos and racetrack/slots operations, mostly in middle America and the South. Penn's primary properties are a "racino" combining slots and horse racing in Charlestown, W.Va., and a riverboat casino in Lawrenceberg, Ind. Expansions are under way to make both properties even more dominant players in their respective markets.

Penn's management has a history of running its properties at high profit levels. The company is projected to report 28% EBITDA margins (earnings before interest, taxes, depreciation and amortization), above the 26% average for small-cap and mid-cap companies in 2006.

Penn posted a return on equity of 24% in the past 12 months. The firm's earnings per share are expected to grow 15% annually from 2006 to 2008.

On a relative valuation level, the shares look attractive. Penn, at $45.56, trades at 22 times estimated 2007 earnings per share, compared with the 35 times average of the mid-cap and small-cap gaming stocks.

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