Stock Analysis & Ideas

Can Penn National Gaming Stock Make a Comeback?

Penn National Gaming (PENN) owns and operates properties for gaming and racing activities in the Northeast, South, West, and Midwest of the United States, as well as an interactive division for online gaming such as social casinos, bingo, and retail sportsbook. I am bullish on Penn National Gaming stock. 

The war in Ukraine, with the associated consequences of growing concerns about the supply of oil and gas and other commodities, has diverted traders’ attention away from other sectors. The consumer cyclical sector has reported losses of almost 17% so far this year.

While these headwinds have pushed Penn National Gaming down more than 29% so far this year, I think the stock has a chance to recover and eventually outperform most of its competitors. The market should, of course, show renewed interest in consumer cyclical stocks. 

Investors preparing for the event should consider Penn National Gaming shares, as it appears cheap given their upside potential, and as such, the stock appears to be an interesting opportunity.

Penn National Gaming’s Q4-2021 Results

Barring a slowdown in the last half of December, Penn National Gaming’s portfolio has shown strong execution across all businesses, including its interactive business, in the last quarter of 2021.

The driving force that was common to all sectors was the positive development in visitor numbers from the younger crowd. The company’s strategy is based on this observed trend and focuses on retaining this demographic.

As a result, Penn National’s total revenue rose 53% year-over-year to $1.57 billion for the fourth quarter of 2021, laying a solid foundation for earnings growth. Earnings rose more than 271% year-over-year to $0.26 per diluted share.

However, while revenue beat analysts’ median forecast by $58 million, GAAP earnings per diluted share missed analysts’ median estimate by $0.26.

Adjusted EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent charges) was $480.5 million for the fourth quarter of 2021, a 31.5% increase from the prior-year quarter.

Shareholders certainly welcomed the 17.2% increase in revenue from 2019, the shift in earnings from net loss per diluted share of $0.80 in 2019, and the 20.3% increase in the adjusted EBITDAR from 2019.

The company’s strategy of attracting more customers from the youngest sections of the American population is paying off.

Market Outlook

The company’s earnings data for the latest quarter shows a positive trend in the number of users adhering to the company’s gambling and racing offerings, as well as its online entertainment services.

The company should continue to report revenue and earnings growth on positive momentum fueled by the growing mania among younger Americans for various gaming and gambling activities, including those that can be conducted online.

According to ResearchandMarkets’ estimate, reported by PRNewswire on March 4, 2022, the U.S. casino market was worth $70.1 billion last year. According to technavio.com’s report analysis, this market should grow at 3.5% each year for the next four years through 2025, amounting to approximately $11.42 billion in growth over that period.

Besides the younger demographic factor, the growing online casino market will be another major driver of the U.S. casino market due to the increasing adoption of gambling apps and advances in mobile technology. 

Penn National Gaming appears to be able to capitalize on the positive contribution that the online gaming business and the following key factors will bring to its business.

These other key factors are:

• The increasing role cryptocurrency is playing in the gambling world and legalization

• The strengthening of sites with payment options and the provision of welcome bonuses. 

As Las Vegas attracts casino players from around the world, this gives Penn National Gaming and other U.S. resort and casino operators a strong advantage over their overseas competitors.

Earnings Estimates

Analysts estimate that Penn National Gaming’s earnings per share will drop 20.6% in 2022, and then grow 26.8% and 22.9% in 2023 and 2024, respectively.

Balance Sheet

Penn National Gaming’s financial strength should also benefit from more responsible management, which would improve its financial condition and give the market an idea of a healthier company from a financial perspective.

Penn National Gaming has an Altman Z-Score of 0.93, which means bankruptcy risk could materialize within a few years. For beginners, the Altman Z-Score predicts the probability that a company will go bankrupt within a few years. A value lower than or equal to 1.8 indicates a financial distress zone, so the probability of business failure is not small. 

However, the positive outlook regarding the market’s growth prospects and the company’s strategy, in line with the current trend among young people, suggests that this risk could diminish over time.

Wall Street’s Take

In the past three months, 14 Wall Street analysts have issued a 12-month price target for PENN. The company has a Moderate Buy consensus rating based on nine Buys, five Holds, and zero Sell ratings.

The average Penn National Gaming price target is $64.21, implying 74.2% upside potential.

Stock Statistics 

Shares are changing hands just under $37 for a market cap of $6.2 billion, a P/E ratio of 14.9, and a 52-week range of $35.90 to $104.91. 

The stock has a price-book ratio of 1.5, a price-sales ratio of just over 1, a price-to-cash-flow ratio of 6.8, and a price-to-free-cash-flow ratio of 9.4x. 

The stock price is below the 50-day moving average of $44.92 and trades well below the 200-day moving average of $59.43.

Conclusion

The stock has fallen significantly this year, but that doesn’t mean the company isn’t doing well. The company’s sales and profits are above pre-pandemic levels and are on track to continue to improve. The stock could rise once market interest in energy stocks cools off.

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