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.
Updates on Previous Stock IdeasThe
Update: Brookfield Properties (Own)Brookfield Properties ( BPO) is up 9.7% since my recommendation, as commercial real estate stocks continue to perform well. The bidding war for Equity Office Properties ( EOP) continues to boost valuations for office REITs. As a reminder, Brookfield is not a REIT, but it walks and talks like one, with a 1.7% dividend yield. The company reports earnings on Friday, Feb. 9. Office owners should continue their strong performance in the near-term as many Equity Office shareholders eventually recycle the proceeds from a buyout back into the office space. If Equity Office accepts the Blackstone cash bid, as opposed to Vornado's ( VNO) cash-and-stock offer, about $8 billion of capital will flow back to dedicated real estate funds, according to a recent Deutsche Bank report. Much of this will find its way into Brookfield's stock.
Update: Ryland (Flag)Ryland's ( RYL) stock is up 4.3% since being flagged as overvalued relative to the rest of the homebuilders. Much of the homebuilders' strong performance in recent weeks has come from a string of earnings reports that were not as disastrous as analysts had expected. However, Ryland's guidance for 2007 looks too optimistic in my opinion. Then again, so does that of nearly every other homebuilder. All builder guidance currently has a big asterisk next to it, since it excludes any future land impairment charges. The thesis on Ryland remains unchanged. Eventually the company will be forced to cut its prices on homes to move product, causing larger land writedowns and write-offs than the market expects.
Update: Trump Entertainment (Flag)The initial approval in recent weeks of a smoking ban compromise in Atlantic City is a best-case scenario for Trump ( TRMP). The stock is up 2.8% since I flagged it as a company not worth owning. I still believe the Atlantic City market is facing other negative headwinds, such as the introduction of slots to Pennsylvania and New York, along with the possible introduction of legislation that would legalize slots at New Jersey racetracks. Trump reports earnings on Wednesday, Feb. 7.
|Bricks and Mortar Portfolio|
|rating date||price at rating||rating||current price*||portfolio return|
|Global R.E. ETF||1/23/2007||$64.00||Own||65.95||3.0%|
|*market close 2/5/07 |
**While these stocks are up since the initial rating, they are tracked as a negative return for the portfolio, since the stocks were "flagged."