The document recommends buying shares of Pinnacle Entertainment (PNK) based on the following points: 1) PNK shares are trading at a valuation below their historic range and below peers, despite decent business trends. 2) Two new property openings, River City and Lumiere Place, will drive significant EBITDA growth over the next few years. 3) PNK is addressing debt covenant issues but the analyst believes they will negotiate relief given improvements in credit markets.

2. Gaming Research / Company Model PNK is currently addressing issues in connection with it’s senior secured credit facility as the company is at risk for breaching leverage covenants during 2010, due to the timing of completion of it’s River City project in St. Louis. Availability of the facility is currently limited to $350 million due to sub-debt covenant’s that may be be waived subject to PNK achieving specific EBITDA performance metrics during the back half of 2009. Recently credit markets have re-opened some and allowed other operators such as Wynn, MGM and Ameristar (ASCA) to successfully amend and restructure debt. We believe this bodes well for PNK. Most recently, ASCA’s valuation/stock price increased due to it’s success in adjusting covenants and amending the terms of it’s senior credit facility. We believe the ASCA transaction may provide a roadmap for PNK’s effort here due the to general similarities of the business models and credit metrics of the two companies. The company has highlighted it’s liquidity position and based on our model, we believe PNK can fund completion of River City from current liquidity.

3. Risks to our estimates include new and enhanced competition for it’s Belterra facility, potential gaming expansion in Ohio and Texas, development/construction cost overruns and further slowing of the U.S. economy/gaming spend.

5. The interest rate add-on was increased by 125 bps, therefore the the facility now bears interest at LIBOR + 325 bps. The company also paid one time fees.

6. Increased the aggregate limit on capital expenditures.

7. The permitted incurrence of senior unsecured debt was set without limitation as to amount.

8. Other affirmative and negative covenants were set, such as fixed charge coverage ratio and and increase in EBITDA to maximum total permitted and senior leverage ratios.In May 2009, ASCA paid down approximately ½ of it’s senior secured credit facility through the issuance of $650 million of 9.25% senior unsecured notes at 97.09. As a result of this transaction ASCA’s senior secured debt was reduced to approximately 2:1 TTM EBITDA. As a result of the credit facility amendment transaction and a better than expected Q109 results, ASCA’s valuation/stock price increased as the liquidity issue was removed.<br />PNK will be required to manage through a similar issue as the company is currently at risk for a potential covenant violation during 2010 in connection with the River City build-out, as debt to EBITDA peaks in connection with this development. In addition, PNK is limited to $350M of senior facility debt capacity as part of it’s sub-debt covenants, which may be waived/partially waived subject to achieving 2:1 EBITDA to total interest (which may occur during the 3rd quarter 2009) subject to overall maximum permitted indebtedness covenants. We believe PNK is currently working on restructuring it’s debt to address these issues.<br />We have compared PNK’s key credit metrics to ASCA’s and found that they are roughly comparable, with PNK comparing favorably re: senior secured debt to EBITDA at 1:1 vs. ASCA’s restructured 2:1 ratio. As a result, PNK may obtain a more favorable interest rate than ASCA in a restructured facility. The companies also share some similarities (in terms of markets where they operate) and differences, as ASCA will de-lever post 2009, subsequent to their Colorado room build-out later in 2009, while PNK will as well but would like to pursue additional incremental development projects post River City such as Sugarcane Bay. Because of this, timing of a potential PNK restructuring transaction, credit market conditions and other factors, we have not attempted to predict the precise terms of a potential amendment for PNK. We do note however that WYNN, MGM and ASCA’s stock prices adjusted upward in connection with similar debt restructuring events. As a result, we believe resolution of this issue could be a positive catalyst for the stock. <br />Our model includes development costs and capital expenditure assumptions for and through the completion of River City during the first half of 2010. Based on our assumptions, we believe PNK has adequate liquidity to complete this development without the issuance of additional equity. We also believe that PNK would be willing to commence the Sugarcane Bay project subject to credit availability/costs and other factors as PNK views this project positively given the significant positive return on investment on it’s L'Auberge facility and current excess demand. Currently PNK maintains a dominant market share in Lake Charles, LA, a market where historic demand has typically grown as supply has been added. While we have not included this project or others in our company model, we view this project as attractive and believe PNK would be willing to commence the project if capital is available in the low to mid 9% range. It is our understanding that PNK will look to sequence the project from a balance sheet vantage point in order to avoid an equity issue.<br /> <br />Figure 6: Debt/EBITDA (4Q08 - 2011E) Through River City Build-out-67310-4445 Source: Company filings, Carlson Research estimates <br />Figure 7: Capex & Free Cash Flow ($ in millions) Through River City Build-out-58420-4445 Source: Company filings, Carlson Research estimates <br />Figure 8: PNK/ASCA Senior Debt to EBITDA Figure 8a: PNK/ASCA EBITDA to Interest -205105-4445 -58420-4445 Source: Wall Street estimates, Carlson Research estimate Source: Wall Street estimates, Carlson Research estimate<br />Figure 8b: PNK/ASCA Gross Debt to EBITDA Figure 8c: PNK/ASCA Net Debt to EBITDA -1206504445 11430013335 Source: Wall Street estimates, Carlson Research estimate Source: Wall Street estimates, Carlson Research estimate<br /> <br />Valuation<br />At $9, the stock is trading at 6.0x, 7.2x and 5.2x our 2009 – 2011 EV/EBITDA estimate. Recently PNK’s major competitors traded at 7x – 8x 2009 EBITDA. Our 12 month target price is $14 based on 7x 2011 EBITDA less debt, discounted 1 period at 15%. PNK has traded at 6x – 11x forward EV/EBITDA between 2002 – 2008.<br />With completion of River City in St. Louis, PNK’s cash flow composition will significantly change with the majority of valuation support coming from St. Louis and Louisiana as we estimate 37% and 53% of total property EBITDA will be derived from these two markets during 2011.<br />The valuation model does not include value for unused assets (Colorado and Atlantic City land for example) or for potential development projects in Lake Charles (Sugarcane Bay) and Baton Rouge Louisiana or Colorado. The model also does not include any assumptions for potential management contracts or other transactions.<br />While we are not implying that this will occur, we have stress tested our model for a significant decrease in revenue for PNK’s Belterra property in Southern Indiana and have found that the impact on the 2011 valuation is negligible. We have also made assumptions for Reno that include negative cash flow assumptions for 2009 – 2010 and zero cash flow for 2011. These assumptions may be conservative assuming that PNK will continue to evaluate it’s operational, development and potential sale options for all or part of this property, therefore neutralizing our negative assumptions.<br />We view the current multiple as cheap but recognize the risks tied to the current overall financial crises/consumer recession. A continuing overall crises and challenging issues in the credit markets will likely continue to depress industry and company valuation metrics. At the same time, a current stock price of $9 provides a current potential return to our 1 year target of approximately 70% and two year target of 83%. As a result of the above, combined with PNK’s high rate of overall EBITDA growth relative to the industry, we recommend the stock at $9 for investors with a horizon.<br />Additional Comment’s<br />River City project, St. Louis – We expect that more will be said and written about the project over the next several quarters as the calendar moves toward a first half 2010 property opening. This project is the “carrot” in the St. Louis licensing combination PNK acquired a few years ago. It is our understanding that the property design, business model and marketing strategy will primarily focus on the immediate surrounding locals market. We believe locals market properties can deliver optimal EBITDA margins and ROIC compared to destination type properties in destination markets. In the Las Vegas locals market for example, operators have generally delivered better margin and return performance than LV Strip operators, owing to the smaller capital requirements of these projects and recurring revenue stream nature of a customer base that tends to make frequent repeat visits.<br />The property may very well exhibit a pattern of sequential and steady improvement over a period of years as it develops the local surrounding market, which may be currently under served. This longer term sequential ramp pattern may not be reflected in current street estimates that only address the initial ramp up phase to a combined St. Louis mid teens return. While we have not assigned a higher multiple to our SOTP company valuation, this may be possible in the future given the potential superior return and risk profile of this type of property.<br />Sugarcane Bay project, LA – We like the return potential of this project and believe PNK will pursue development here subject to credit availability and costs. PNK has indicated that it’s existing property is operating near capacity. PNK’s existing property, L’Auberge has delivered consistently exceptional results with current EBITDA ROIC at approximately 25% ($90m ish TTM EBITDA/ approx. $360M cap-ex). The property continues to perform exceptionally well owing to a number of factors including positive energy based economic factors in the region. While there is some level of ongoing risk that Texas may ultimately legalize gaming, we believe potential demand in the market would support PNK’s development effort. As this project is not currently included in our model, we view it as potential upside to our company estimates and valuation.<br />Risks and disclosures<br />The thesis and opinions expressed in this report reflect my personal view. No part of my compensation was directly or indirectly related to specific recommendations or views expresses in this research report. Readers should consider this report as only a single factor in making investment, business and/or economic decisions. As we are not your advisor we do not take responsibility for any action you take based on this report. This publication is provided to you for information purposes only. The views in this publication are those of the author and are subject to change, and the author has no obligation to update the opinion or information in this publication. The author does not accept liability for any direct or indirect losses arising from use of this publication or it’s contents. The author recommends that readers of this report consult with any personal advisor’s they deem necessary before taking any actions based on this report. Actual results may and are likely to be materially different than those indicated in this report. We have received no compensation from the companies mentioned in this report and do not have an economic and/or advisory relationship with PNK and/or other companies mentioned in this report. We currently own shares in PNK. Finally the author does not provide tax or financial advice and nothing contained herein should be construed to be tax or financial advice.<br />