Penn National Gaming, Inc., (PENN) is a Wyomissing, Penn.-based gaming and live sports betting properties operator. It holds ownership interests in 41 gaming and racing properties across 19 states. Although COVID-19 related store closures and restrictions impacted the company’s land-based gaming properties last year, with nearly half the U.S. population now fully vaccinated, visitation and length of play has improved significantly across all its segments. PENN’s stock has gained 146.9% over the past year on strong revenues from the online Barstool Sportsbook and iCasino platforms.

However, its share price has tumbled 29% over the past three months and 11.6% year-to-date. The stock is now trading 46.2% below its 52-week high of $142, which it hit on March 15. 

While PENN has successfully launched its online Barstool Sportsbook in Michigan, Pennsylvania, Illinois, and Indiana, the company’s expansion plans could hit a hurdle given that sports betting is still not legal in many states. Furthermore, PENN’s stock is currently trading lower than its 50-day and 200-day moving averages of $82.12 and $87.95, respectively, indicating a downtrend. So, the stock’s near-term prospects look uncertain.

Here is what we think could influence PENN’s performance in the coming months:

Strategic Acquisition

This month, PENN completed the acquisition of Hollywood Casino Perryville in Maryland for $31.1 million in cash. The company entered  a lease with Gaming and Leisure Properties, Inc. for the real estate assets associated with Hollywood Casino. The acquisition marks the company’s re-entry into the Maryland gaming market and its 20th gaming jurisdiction in the nation. With the legalization of sports wagering in Maryland, PENN is well positioned to expand its omni-channel platform at Hollywood Casino Perryville.

Mixed Growth History

PENN’s revenues and total assets have increased at CAGRs of 6% and 42.3%, respectively, over the past three years. Its levered free cash flow increased at a 32.3% annualized rate  over this period. However, the company’s EPS and net income have declined at CAGRs of 66.3% and 61.2%, respectively, over the past three years, and its EBITDA declined at a 4.3% rate over this period.

Unstable Financials

Although PENN’s Northeast segment revenue rose 9.6% year-over-year to $570.9 million for the first quarter, ended March 31, 2021, its West segment revenue declined 23.7% from its  year-ago value to $96.6 million. Its adjusted EBITDAR under its Other segment came in at negative $21.3 million, while its operating expenses under gaming surged 5.4% from the prior-year quarter to $527.8 million. Also, PENN’s Food, beverage, hotel and other revenues declined 9.5% year-over-year to $192.9 million over this period.

The company’s 51.3% trailing-12-month gross profit margin  is 47% higher than the 34.9% industry average. But PENN’s net income margin, ROE and ROA of 0.8%, 1.5% and 0.2%, respectively,  are 82.3%, 87.3% and 94.7% higher than the  industry averages.

Consensus Price Target Indicates Potential Upside

Of the 13 Wall Street analysts that have provided ratings for the stock, seven rated it Buy and four rated it Hold. Currently trading at $76.38, analysts expect the stock to hit $107.85 in the near term, indicating a 41.2% potential upside. The price targets range from a low of $31 to a high of $151.

POWR Ratings Reflect Uncertainty

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

Our proprietary rating system also evaluates each stock based on eight different categories. PENN has a C grade for Value. The company’s 29.46 non-GAAP P/E ratio, which is 71.9% higher than the 17.13 industry average, is consistent with its Value grade.

In terms of Quality Grade, PENN has a B. This is in sync with its higher-than-industry gross profit margin.

However, the company has a D Sentiment grade. Analysts’ expectations that its EPS will decline 24.7% in the next quarter ending September 2021 justifies the Sentiment grade.

In addition to the grades we’ve highlighted, one can check out additional PENN ratings for Momentum, Growth, and Stability here. PENN is ranked #9 of 30 stocks in the D-rated Entertainment – Casinos/Gambling industry. For other top stocks in this industry, make sure to click here.

Bottom Line

An increase in spend-per-visit as patrons return to casinos, and impressive revenue gains in the Northeast and Midwest segment as PENN continues to strengthen its online Barstool Sportsbook platform, have benefited the company significantly. But although the growing sports betting market should bode well for the stock, given that many states still do not allow sports wagering and betting the company’s near-term growth prospects look uncertain. So, we think it could be wise to wait for better entry points in the stock.

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