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Penn National Gaming: Speculative, but Positioned for Growth
Stock Analysis & Ideas

Penn National Gaming: Speculative, but Positioned for Growth

Penn National Gaming (PENN) is a leading, diversified, multi-jurisdictional owner and manager of gaming and racing properties, retail and online sports betting operations, and video gaming terminal (VGT) operations.

The company runs retail sports betting across its portfolio, as well as online sports betting, online casinos, and bingo. (See Insiders’ Hot Stocks on TipRanks)

Last year, Penn acquired a 36% equity state in Barstool Sports, a leading digital sports entertainment company. Through Penn’s investment, Barstool Sports will exclusively support Penn’s land-based retail sportsbooks, online casino products, and online sports betting products, including the Barstool Sportsbook mobile app, to its national audience.

Penn seems to be smartly pivoting towards online gambling, with shares appreciating multiple times over since their COVID-19 sell-off lows.

The stock rallied from just over $10 in March 2020 to over $140 in March 2021. Still, with speculation regarding the company’s long-term growth prospects, shares have now steeply declined back under $80.

While I remain confident in the future of online gambling and Penn’s ability to navigate into the space adequately, the stock’s short-to-medium-term pathway is hard to predict. I am neutral on the stock.

Sports Betting Market

At the moment, sports betting is not legal across all U.S. states. Still, we can get a rough estimate of the industry value through some napkin math. New Jersey sportsbooks made history in September, reporting a $1-billion handle in a single month.

Sports betting revenue was $82.4 million, which is just under the $82.6-million record of January 2021. On an annualized basis, this would come out to around $985 million, or say $900 million, to account for any weaker months, specifically the summer months.

The State of New Jersey accounts for around 3% of the country’s population. Assuming sports gambling were to be legalized nationwide, the above figure could translate to around $30 billion.

Of course, this is a very rough estimate, and due to all the state and federal taxes, revenue sharing agreements, and the whole regulatory framework, only a small chunk of this amount is likely to end up on the industry players’ bottom line.

Also, some states are likely to spend more on sports betting, while the industry itself could grow further. Still, assuming a modest net income margin, the sports betting market could offer close to a $10-billion net income opportunity, based on the current numbers.

Even if Penn were to capture a humble chunk of the U.S. market in the long run, the company’s net line could grow significantly going forward.

Sports betting is being legalized in one state after the other, while Penn is making all the necessary preparations to position itself to benefit from this growing market.

For instance, the company just completed its previously announced acquisition of Score Media and Gaming for total considerations of approximately $2 billion in cash and stock.

Valuation

Penn is currently expected to deliver FY 2021 EPS of $3.31, which implies a forward P/E of 23.7.

While this multiple does not seem sky-high for a company that appears to be positioning itself to grow its net income moving forward from a growing industry, Penn is rather a speculative investment.

It’s very hard to predict which of the multiple big players in the industry will come out as the most dominant one, while future margins, market shares, CAPEX requirements, advertising costs, etc., in the space are hard to predict.

Wall Street’s Take

Turning to Wall Street, Penn National Gaming has a Moderate Buy consensus rating, based on eight Buys, three Holds, and one Sell assigned in the past three months. At $96.17, the average Penn National Gaming price target implies 22.3% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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