New Morningstar Analyst Report for Penn National Gaming

Penn National Gaming operates regional casinos and racinos. During the 17-year span between 1990 and 2007, when the regional gaming industry grew from under $1 billion in revenue to over $16 billion, the company transformed itself from a small operator of horse race tracks in Pennsylvania into the second-largest operator of regional casinos in the country, with sales over $2 billion. Penn was one of the pioneers of "racinos," or hybrid gaming emporiums which combine casino operations with horse racing operations. While Penn has the strongest pipeline of properties under development among regional casino operators, industry growth has slowed, and is becoming increasingly saturated and cyclical in nature. Penn's narrow economic moat is weakening, as its existing casinos face intensifying competition from new casinos opening in states that have already legalized casino gambling, and new competition from states looking to expand into casino gambling. We expect the firm's existing properties to experience a near double-digit decline in revenue and cash flow the next two years. We do not think the market has fully recognized the level of intensifying competition Penn faces, and we view shares of Penn as modestly overvalued.