Stephen Frankola: Notes on PENN, FSLR, and BWLD
June 24th, 2008 by 
CA Editors
Stephen Frankola sends: My apologies for no regular updates recently - I now work full time AND take an evening class (every day). What a fun summer!
Here are some noteworthy happenings of late:
Penn National Gaming (PENN), which has a pending takeover deal with Fortress Investment Group (FIG) and others at $67/share, has seen its share price crumble over the past week as other deals have fallen through (and maybe because of general market weakness).
Shares have fallen from about $45 this time last week to the current $33. Yep, that’s right… if the deal somehow goes through, any arbitrager could make over 100%. That isn’t an accidental inclusion of an extra “0.”
To me, it seems like the deal failure is now priced in. (Then again, I said that yesterday, when shares were about $2 higher, to my father in an email). PENN trades at a 18x trailing P/E and a 15 forward P/E, which is a much cheaper valuation than when the deal was proposed!
As a regional casino operator, PENN should do well during tough economic times. People may not be able to drop a grand to go to Vegas for a week… but they can afford a little gas to drive to the nearest casino to gamble a couple dollars away.
I believe that the deal, in some form, will go through, whether it’s a $67, $57, or $47. If it doesn’t, PENN gets $200 million, which is about $2/share. I can’t imagine the stock dropping that much farther if/when a non-deal is announced… but I’ve been thinking that for a while. Either way, I see either a huge short-term or steady long-term gain in PENN shares from this point.
First Solar (FSLR) continues to baffle me. After trending lower from a high of about $320, it has climbed back near the top. Most recently, FSLR jumped $17 yesterday because one analyst upped his price target, and claimed that one particular variable could lead to $30 million more revenue than previously anticipated.
So let me get this straight… the potential for $30 million more revenue leads to… a $1.4 billion increase in market cap?! Makes sense to me!
(I understand that market cap isn’t really a metric that should be used on a day-to-day basis… but that statistic helps exemplify my opinion that FSLR’s valuation is out of control).
I’m still short…. and hoping that the bottom falls out soon.
Lastly, Buffalo Wild Wings (BWLD) is down 15+% over the past few sessions after an analyst downgraded on valuation and chicken-price concerns. However, BWLD has managed to keep growing earnings at its 25%/year target even as chicken prices increased in the past, so I see no material change to their business. I’d say that this is a good entry point for a great company.
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June 25th, 2008 at 9:45 am
For the sake of clarification/full disclose:
I eased into PENN over the past couple sessions so my cost basis is somewhat near the current price (lets call it $35/share). If I had been holding all along (and didn’t sell when it started to tank), I WOULD consider adding to a position at this point. Even now, as the price is firming somewhat (in the first 15 minutes of an up day), it’s still very very attractive.
June 26th, 2008 at 6:31 pm
I’ve been following PENN for quite some time. I would wait for FIG to walk before buying. BX walked from ADS, and the stock plummeted, but it has been on a tear since.
PENN is a well run company, and has done stellar, but it’s still over priced in today’s market. I think it should be in the low 20’s to be considered a decent value. Too much debt, falling net income, debt financing environment bad.
I’ll wait to see what happens.
June 27th, 2008 at 10:26 am
there is definitely downside potential, but low 20s is more pain then I’d foresee unless the entire market crashes.
PENN held up well in yesterdays weakness, squeaking out a small gain when indexes dropped 3%. The volume has returned to more reasonable levels after huge numbers as the stock was plummeting. I’m hoping that most of the fickle arbitrage players have now left, which would help to limit future downside.