Penn National Gaming, Inc. (NASDAQ:PENN)

OK, we have prisons, data centers, gas stations...and now casinos. One company after another seems to be converting either completely or partially into "tax-efficient" vehicles like MLPs and REITs lately. Today a company in yet another sector announced that it's taking the leap...gaming. Penn National Gaming (PENN) announced today that it is planning to convert into two companies, one of which will be a REIT that owns all of the organization's real estate and leasts it to a Penn National operating company. Not surprisingly, shares of PENN soared nearly 30% on the news of this move.

According to what I've read, current PENN shareholders will receive one share of the new REIT and $15.40/share in a taxable dividend...$5.35 in cash and the rest in more REIT shares. Initially each REIT share will be paid in dividends annually $2.36 per share.

One Barclays analyst was quoted saying that they value the new company at a whopping $67 to $76 per share, significantly higher than today's $48.23/share and that's after the huge pop. The stocks of a number of other regional casino operators soared on this news as well today as investors speculated that they might make smiliar moves.

If you ask me, all of these conversions to REITs and MLPs are great for investors, but probably not so much for the government. One has to wonder if Uncle Sam will eventually say enough is enough and pull the plug on the whole thing like the Canadian government did in the infamous (at least to income investors) Halloween Massacre several years ago when all sorts of non-real estate companies began converting into CANROYs. Perhaps the U.S. government will recognize the need for yield-generating investments in the zero interest rate world that it has created and look the other way. Time will tell. One way or another taxes are going to likely increase in the future and eliminating or restricting REIT / MLP conversions has to be something that politicians are considering. As someone who loves special situations and is a yield hound, I hope not, but you never know.

Deej

PROFETS AHEAD

I see their casino expansions paying off, getting some locations for bargains. With more accessible locations, I see them being very competitive with the casinos in Atlantic City.

This seems to be one of the better casino stocks.

It's a gamble. But if I'm going to gamble, I want to be on the house's side of the table.

momentum, recent price break out, 3 of 4 quarters increased earnings, 87% under industry value, 82% under sector value

valueline

Recent up swing based on above expected earnings. Although not a company that is a loser it is currently not positioned in emerging upscale money markets. Competition is strong in the sector and services are fair at the local company store ( Pen National Grantville, Pa) which is supposed to be one of their best.

Penn

New projects coming online; improved consumer discretionary spending.

Short term dip over the next few weeks. I am seeing a 15% decline and bottom out back to gains

akre

buy

Settlement monies coming in should help bottom line. It has been beaten up too much.

Chuck Akre of FBR Focus is an investor we admire and he's loaded up 16% of his fund with PENN. He mentioned the company to us back in early 2007 as one of his favorite stocks. It's been a tumultuous eighteen months for PENN, to be sure, first with the private equity deal falling through and then decreased consumer spending hitting the gambling sector hard. But the future looks a lot brighter for PENN than its current stock price would imply. It's to receive $1.45 billion in compensation for the PE deal and that gives the company a whole lotta options in a down market. Judging from the tone of the most recent earnings call, it sounds like management is just now getting back into the mindset of being a publicly-traded company. I guess they were convinced the buyout would go through, so it might take some time for this pick to realize its full value (probably around $30-$33 today), but as the song goes "time is on my side". And on CAPS, we have all the time in the world to let this one ride.

Todd (disclosure: owns FBR Focus)

Casino.

Creating a portfolio based on calling outperform on every alcohol, tobacco, pornography and gambling stock I can find.

depends on sale.

Great arbitrage play. Upside gain is significantly lower than the downside risk.

Deal or No Deal