Penn National Gaming, Inc. (PENN - Get Rating) owns and manages gaming and racing properties and operates video gaming terminals. The Wyomissing, Pa.-headquartered company also operates online social casinos, bingo, and sports betting apps under the iGaming name in Pennsylvania and Michigan. Shares of PENN slumped 21.1% in price on November 4 after the company reported third-quarter earnings that missed the consensus estimate. CEO Jay Snowden pointed to Hurricane Ida and the continuing spread of the COVID-19 delta variant as causes of operational disruptions. The stock’s sell-off was also driven by controversies surrounding Barstool Sports Founder Dave Portnoy. PENN holds a 36% stake in Barstool Sports.

Over the past five days, the stock has declined 13.7% in price to close its last trading session at $61.76.

PENN’s weak bottom-line is reflected in its third-quarter earnings report. Its net income declined 39% from its year-ago value to $86.10 million in the quarter ended September 30. PENN’s EPS has decreased 44.1% year-over-year to $0.52, which missed the $0.89 consensus EPS estimate by 41.5%. However, PENN’s total revenues increased 33.8% year-over-year to $1.51 billion.

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

Lawsuits

Bronstein, Gewirtz & Grossman, LLC is investigating potential claims on behalf of purchasers of PENN concerning whether the company and certain of its officers and/or directors have violated federal securities laws. Also, The Thornton Law Firm has notified  investors that it is investigating PENN for potential securities violations. The ongoing lawsuits and controversies around David Portnoy, founder of Penn National’s partially owned affiliate Barstool Sports, could foster the loss of investors’ confidence.

Stretched Valuation

In terms of non-GAAP forward P/E, PENN is currently trading at 22.40x, which 44.8% higher than the 15.47x industry average. Also, its 3.32 forward EV/Sales ratio  is 124.3% higher than the 1.48 industry average.

Furthermore, PENN’s forward Price/Sales is 37.5% higher than the 1.30 industry average, and its forward Price/Cash Flow is 30% higher than the 13.55 industry average.

Mixed Profitability

PENN’s 48.88% gross profit margin is 36.5% higher than the 35.82% industry average. Also, its EBIT margin and EBITDA margin of 17.94% and 24.25%, respectively, are 88% and 88.9% higher than the industry averages.

However, PENN’s 13.71%, 2.46%, and 4.21%  respective ROE, ROA, and ROTC  compared with the 17.40%, 6.22%, and 7.65% industry averages.

POWR Ratings Reflect Uncertain Prospects

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

The stock has a C grade for Growth, which is consistent with its mixed financials in its last reported quarter.

PENN has a D grade for Stability, in sync with its 2.44  beta.

Of the 30 stocks in the Entertainment – Casinos/Gambling industry, PENN is ranked #13.

Beyond what I have stated above, one  can also view PENN’s grades for Quality, Sentiment, Momentum, and Value here.

View the top-rated stocks in the Entertainment – Casinos/Gambling industry here.

Bottom-Line

People’s engagement in online gambling increased substantially during the pandemic due to the remote lifestyle. Moreover, with the easing of travel restrictions and social distancing mandates, physical casinos are experiencing rising foot traffic. Given this backdrop, gaming businesses are expected to thrive. However, PENN’s stretched valuation and weak bottom-line make it less attractive than its peers. And  ongoing lawsuits are a concern. Thus, we think investors should wait for PENN’s prospects to stabilize before investing in the stock.

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

While PENN has an overall POWR Rating of C, one  might want to consider taking a look at its industry peers, Century Casinos, Inc. (CNTY - Get Rating), Golden Entertainment, Inc. (GDEN - Get Rating), and International Game Technology PLC (IGT - Get Rating), which have an A (Strong Buy) rating.

PENN shares were trading at $62.07 per share on Monday morning, up $0.31 (+0.50%). Year-to-date, PENN has declined -28.13%, versus a 26.82% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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