Headquartered in Wyomissing, Pennsylvania, Penn National Gaming, Inc. (PENN - Get Rating), along with its subsidiaries, owns and manages gaming and racing properties and operates video gaming terminals.

The company provides casino gaming, online gaming, live racing, sports betting, and digital sports content.

The stock has declined 59.2% over the past year and 58.5% over the past nine months. The company increased its full-year projections after reporting solid first-quarter revenue that exceeded Wall Street expectations.

However, the stock plummeted as earnings per share missed the consensus estimate by 33.3%.

While the gambling industry’s significant growth over the past few years due to the ongoing legalization of gambling-related activities and rising demand for online gambling should bode well for PENN, its premium valuation and mixed growth attributes make its near-term prospects look uncertain.

Here is what could shape PENN’s performance in the near term:

Mixed Profitability

PENN’s 48.7% trailing-12-month gross profit margin is 34.5% higher than the 36.3% industry average. However, its trailing-12-month net income margin and ROC are 6.4% and 35.5% lower than their respective industry averages.

In addition, its trailing-12-month asset turnover ratio and ROA are 63.5% and 62.9% lower than their respective industry averages.

Premium Valuation

In terms of forward Non-GAAP Price/Earnings, the stock is currently trading at 20.90x, which is 69.1% higher than the 12.36x industry average. Furthermore, PENN’s 2.64x forward EV/Sales is 137.8% higher than the 1.11x industry average.

Mixed Growth Prospects

Analysts expect PENN’s revenue to increase 3.8 % in the current quarter, 7.9% in the current year, and 3.9% next year. However, the company’s EPS is expected to decline 53.8% in the current quarter, 27.4% in the current year, and 41.7% next year.

Moreover, its EPS is expected to plunge at a rate of 239.5% per annum over the next five years.

Unstable Financials

During the first quarter ended March 31, 2022, PENN reported $1.56 billion in total revenue, representing a 22.7% year-over-year increase, primarily attributable to its rise in gaming revenue.

However, its net income declined 43.2% from its year-ago value to $51.70 million, while its EPS decreased 47.3% from its prior-year quarter to $0.29.

Also, for three months ending March 31, 2022, its cash and cash equivalent declined 3.1% from its previous period to $1.81 billion.

Consensus Rating and Price Target Indicate Potential Upside

Among the 14 Wall Street analysts that rated PENN, 10 rated it Buy, and four rated it Hold. The 12-month median price target of $52.43 indicates a 54.7% potential upside. The price targets range from a low of $38.00 to a high of $76.00.

POWR Ratings Reflect Uncertainty

PENN has an overall C rating, equating to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PENN has a D grade for Growth, which is justified given its poor earnings estimates.

It also has a C grade for Stability and Quality. Its 2.36 beta is in sync with its Stability grade. In addition, the company’s mixed profitability is consistent with the Quality grade.

Among the 29 stocks in the D-rated Entertainment – Casinos/Gambling industry, PENN is ranked #13.

Beyond what I’ve stated above, you can view PENN ratings for Growth, Value, and Sentiment here.

Bottom Line

PENN has declined 22.7% over the past three months and is currently trading below its 50-day and 200-day moving averages of $35.26 and $52.10, respectively, indicating bearish sentiment.

Although the gambling industry is poised to grow, given the surging demand for online gambling and various technological advancements, PENN’s higher valuation and mixed profitability are concerning.

Therefore, we think investors should wait before scooping up its shares.

How Does Penn National Gaming, Inc. (PENN) Stack Up Against its Peers?

While PENN has an overall C rating, one might want to consider its industry peer, Century Casinos, Inc. (CNTY - Get Rating), Accel Entertainment, Inc. (ACEL - Get Rating), and Boyd Gaming Corporation (BYD - Get Rating), which have an overall A (Strong Buy) rating.

PENN shares fell $0.08 (-0.25%) in after-hours trading Friday. Year-to-date, PENN has declined -37.94%, versus a -17.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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