Analyst sees potential in Pinnacle Entertainment

LAS VEGAS, Nevada -- Based on stock price valuation alone, 2011 seemed like a bad year for Pinnacle Entertainment.

Shares of the Las Vegas-based regional casino operator lost 28 percent over the last 12 months.

Investors grew concerned when weather issues pushed back completion of the company's $357 million project in Baton Rouge, La., until possibly Labor Day this year.

Stockholders grew worried over the future of the company's flagship L'Auberge du Lac Casino Resort in Lake Charles, La. Rumblings surfaced that neighboring Texas would legalize casinos, but the idea soon fizzled. Then, new competition emerged when Creative Casinos signed a deal in October with MGM Resorts International to operate the $400 million Mojito Pointe next to L'Auberge.

Meanwhile, Pinnacle announced in May it was spending $95 million to acquire a 26 percent interest in a resort development in southern Vietnam, a project where MGM Resorts is building the primary hotel-casino.

So where does this leave Pinnacle?

Credit Suisse gaming analyst Joel Simkins said the company might still have a high risk for investors. However, Pinnacle offers the potential for high rewards on the investment.

Simkins said Pinnacle's share price already takes into account much of the risks facing the company. A continued rebound in the regional gaming markets -- Pinnacle operates casinos in St. Louis, Indiana and other areas of Louisiana -- will give the company a lift.

"We are cautiously optimistic about signs of life in the regional gaming markets," Simkins said. "2012 will be a year where excellence in execution will be required for the stock to work."

The opening of L'Auberge Casino & Hotel will be a catalyst for Pinnacle. Baton Rouge has two casinos, but Simkins said the new property could take a considerable amount of business away from the competition.

Another potential growth market is Ohio. The state is debating how to add slot machinelike video lottery terminals to the state's seven racetracks, one of which, River Downs in Cincinnati, is owned by Pinnacle.

If the River Downs, which the company acquired for $45 million in 2010, is allowed to build a casino, the business could offset competition from the Caesars Entertainment Corp.-operated Horseshoe Casino Cincinnati, which is expected to open in 2013.

"Pinnacle is relatively well-hedged to help mitigate the impact of additional gaming in the Cincinnati market," said Simkins, who estimated that the company's investment in a casino at River Downs would be between $150 million and $200 million.

Pinnacle has two casinos in St. Louis: Lumiere Place downtown near the Gateway Arch and the suburban River City Casino, where the company expects to spend $82 million to add a 200-room hotel, a multipurpose center and a parking garage.

Once River City has all its amenities, Simkins believes the company will have a financial performance in the St. Louis market that challenges market leader Ameristar Casinos.

To help pay for some of the projects, Pinnacle is expected to reap about $22.2 million from the sale of its Boomtown Casino & Hotel Reno. The transaction is scheduled to close by midyear. Also, the company continues to try to unload an undeveloped casino site in Atlantic City. Simkins said a "bare bones" sale could be worth between $25 million and $50 million.

"This would generate value that could be used to reduce debt or be reinvested into the core business, but more importantly eliminate a modest continued cash drain on the company," Simkins said.

Still, the company's current financial structure allows room for investment.

"Given available free cash flow and borrowing capacity, we believe the balance sheet has flexibility for tuck-in acquisitions and the pursuit of additional growth projects," Simkins said.

Much of the credit for the company's position goes to Chief Executive Officer Anthony Sanfilippo, who took over in March 2010 and immediately instituted changes, such as closing an aging and poorly performing St. Louis riverboat casino and halting a second development in Lake Charles (which has since become Creative's Mojito Pointe).

Despite the 2011 stock price performance, Simkins said Pinnacle could become a compelling story in 2012.

"Management did a commendable job of improving margins, adding to its growth pipeline, deploying an innovative marketing program and shedding noncore businesses," Simkins said.