Chad Brand is the founder and President of
Capital Management LLC
, an RIA firm based in Pittsburgh that focuses on investment
management and consulting services for individuals.
We had the opportunity to ask Chad about his single highest
conviction holding in his portfolio and the investment thesis
• • •
Seeking Alpha ((
)): What is your highest conviction stock position in your fund -
long or short?
Chad Brand ((
Peridot Capital has recently been increasing its long position in
Pinnacle Entertainment (
), a small cap regional gaming company.
Pinnacle focuses on the local casino market, as opposed to Las
Vegas. Although Pinnacle is based in Las Vegas, they have no
properties there (their only presence in Nevada is a property in
Reno). In addition to the Reno location, Pinnacle owns and operates
casinos in Louisiana, Indiana, and Missouri.
SA: How much is this an industry pick as opposed to a
pure bottom-up pick?
Though the gaming and travel industries appear to be set for a
rebound in 2010, Pinnacle is really a bottom-up company-specific
investment idea. I do not have a strong sense that the Vegas
tourist market will snap back meaningfully in the short term, so I
prefer a regional player like Pinnacle, as consumers will have to
travel less to visit their facilities. Pinnacle stock is attractive
due to its meager valuation and growth opportunities through
upcoming new property openings, rather than due to any macro
SA: How is Pinnacle positioned vis a vis its
Pinnacle has chosen to focus its attention on a few states,
building several properties in each, rather than try to reach every
part of the U.S. casino market. As more and more states legalize
gaming and gaming licenses are increased to raise local tax
revenue, there will surely be additional competition in the
regional casino market, but Pinnacle is very focused on strong
markets and building premium properties. Their track record is very
good, so there are reasons to believe they will continue to grow
the company and do so profitably for shareholders.
Currently, Pinnacle owns three properties in Louisiana, two in
Missouri, one in Nevada, and one in Indiana. In March 2010 they
will open a third property in the St Louis market (River City in St
Louis county, which will complement the company's two downtown
properties). In 2011 Pinnacle plans to open Sugercane Bay, a sister
site adjacent to its current L'Auberge property in St Charles,
Louisiana. The company also has plans for another new property to
serve the Baton Rouge, LA market, to open no earlier than 2012.
These growth plans set Pinnacle apart from its competitors, most
of whom are not looking to add properties given current economic
and credit market conditions. Pinnacle's strong balance sheet and
track record gives it the ability to continue to grow, as they
remain a small player in the gaming industry.
SA: Can you talk about valuation? How does valuation
compare to the competitors?
Valuation is the main reason I am so bullish on the prospects for
Pinnacle's stock going forward. Right now, Pinnacle shares trade at
$7.16 per share, giving the company an equity market value of $430
million (about 60 million total shares outstanding). Add in net
debt of $880 million and the enterprise value comes in at $1.3
Based solely on their existing properties, Pinnacle stock trades
in-line with the industry at about 7.4 times trailing EBITDA (2009
EBITDA should come in around $190 million). From that perspective,
Wall Street is assigning absolutely no value to any of Pinnacle's
future projects. If the credit markets were closed and there were
no signs that they could build anymore properties anytime soon,
perhaps that would make sense and the stock would be considered
fairly valued. However, that is far from the case today.
Pinnacle is going to open its St Louis county project, River
City, in March. It is expected that the property will be more
profitable than their downtown casino (Lumiere Place), which
currently earns between $40 and $50 million in annual EBITDA).
Pinnacle believes its total St Louis market will exceed $100
million annually once River City opens and achieves optimal
Assuming $50 million in annual cash flow from the new project,
assigning a 7 times EBITDA multiple on that property pegs its value
at $350 million, or nearly $6 per share. Given that the casino will
open in two months, I cannot understand why Wall Street is
assigning no value to it. The entire company is now being valued
for less than $9 per share, so it is easy to see how undervalued
the company appears to be based solely on this one new casino. Book
value today is more than $12 per share, so the stock also trades at
a 30% discount to the stated value of its assets, which gives me
even more confidence in the stock.
And River City is not the only future growth opportunity for
Pinnacle. Assuming the credit markets and economy continue to
improve, it is very reasonable to think that Sugercane Bay and the
Baton Rouge project could expand the company's cash flow in 2011
and 2012. Those properties would only increase the value of the
company even further.
SA: What is the current sentiment on the stock? How does
your view differ from the consensus?
Pinnacle and the other regional gaming companies are largely being
ignored. Negative sentiment toward consumer related businesses is
likely the reason, coupled with the fact that investors prefer the
glitz and glamour of larger casino companies like [[MGM]] and Las
Vegas Sands (
) that have exposure to the growing Macau gaming market. I am
simply excited about these new properties in Missouri and Louisiana
and the fact that investors don't seem to be assigning any value to
them when they should prove to be quite profitable for
SA: Does the Pinnacle's management play a role in your
Interesting that you ask about management. Pinnacle recently
announced that its CEO, Dan Lee, has resigned. That came after an
embarrassing story about Lee surfaced, in which he traveled to
Missouri and had a controversial meeting with some local lawmakers
before a hearing there. Evidently Lee was told by the Board to stay
in Vegas but instead he got pretty aggressive with some voting
members hours before a vote was scheduled. Reports indicate that
was one of a handful of reasons that led to him leaving. I am
confident that a competent replacement will be found and the rest
of the development and operating team at the company has done a
solid job, so I have no reason to doubt they can do so going
SA: What catalysts do you see that could move the
For me it will really be all about these new properties and the
reaction to them once they start bringing in meaningful profits.
Right now, Pinnacle is spending a lot of money to build these
casinos (which is reducing current earnings) and has not received
any returns yet. Once that changes, EBITDA will increase and the
stock price should follow suit.
SA: What could go wrong with this stock pick?
If the economy takes another leg down and the existing properties
bring in less money, that would affect cash flow and bring down the
stock. Given how resilient they were in 2008 and 2009, it would
take quite an economic shock for that to happen.
More likely, if the new properties perform below expectations
that would hurt the thesis. This could happen if Pinnacle
overbuilds capacity in any one area, or if more and more gaming
licenses being issued by the states result in more competing
properties and therefore less of the gaming pie is available for
SA: Thank you very much for sharing your thesis,
Disclosure: Chad Brand's Peridot Capital is long
Timing Your Buys and Sells