Penn National Gaming, Inc. (PENN) has made a name for itself as one of the established gambling companies. It owns, operates, or has ownership interests in 41 gaming and racing properties in 19 states, and video gaming terminal operations with a focus on slot machine entertainment. Despite having to halt its offering of live sports betting at its properties thanks to the pandemic, PENN has gained 218.3% over the past year to close yesterday’s trading session at $117.82.

As several states are legalizing sports betting and online wagering, PENN is well-positioned to benefit. The company’s acquisition of Barstool Sports and other strategic partnerships have allowed it to expand its market reach. However, several major states are yet to legalize online gambling and the company also faces intense competition from its peers. As a result, PENN’s prospects look uncertain.

Here’s what I think can shape PENN’s performance in the near term:

Increasing Legalization of Sports Betting and Online Wagering

Sports betting used to be considered illegal in the United States until the U.S. Supreme Court lifted the federal ban on sports betting on May 14, 2018. To date, twenty states and the nation’s capital have some form of legal sports betting available.

Also, online gambling in the U.S. is regulated by State Laws. According to Grand View Research, the global online gambling market is expected to grow at a CAGR of 11.5% from 2020 to 2027. Being a market leader, PENN is strategically positioned to benefit as more and more states legalize sports betting and online gambling.

Profitable Acquisition of Barstool Sports

The company completed its acquisition of Barstool Sports, a leading digital sports, entertainment, and media platform on February 20, 2020, and PENN’s stock has more than tripled since then. Moreover, the Michigan Gaming Control Board (MGCB) approved the company to offer online sports wagering and iCasino products in Michigan. PENN launched its Barstool Sportsbook mobile app on iOS and Android, and desktop on January 22, 2021, and its iCasino products are expected to be launched soon subject to final regulatory approval.

A Decline in Revenue Across All Segments

The company’s total revenues decreased 23.4% year-over-year to $1.03 billion for the fourth quarter ended December 31, 2020. The revenue decreased in all the segments during the quarter. Revenue from the Northeast segment decreased 24.2% year-over-year to $470.80 million and revenue from the South Segment decreased 7.1% year-over-year. While revenue from the West segment decreased 49.7% year-over-year, revenue from Midwest Segment decreased 32.6% year-over-year.

Stretched Valuation and Unfavorable Analyst Estimate

In terms of non-GAAP forward price/earnings, the stock is trading at 77.92x, which is significantly higher than the industry average of 18.99x. Also, PENN’s forward enterprise value/sales of 5.63x is higher than the industry average of 1.65x. The stock’s forward price/sales of 3.74x is also higher than the industry average of 1.36x.

Moreover, Wall Street analysts expect the stock to hit $110.6 in the near term, which indicates a potential decline of 4.4%.

Our POWR Ratings Doesn’t Indicate Enough Upside

PENN has an overall rating of C which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 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 grade of B for Quality given its higher-than-industry gross profit margin.

However, the stock has a grade of C for Value, in sync with its stretched valuations.

Beyond what I have stated above we have also given PENN grades for Growth, Momentum, Stability, and Sentiment. Click here to access all of PENN’s ratings.

Out of 30 stocks in the Entertainment – Casinos/Gambling industry, the stock is ranked #11.

Click here to access eight top-rated stocks in the same industry whose prospects seem to be better than PENN.

Bottom Line

Despite closing down several of its casinos amid the coronavirus pandemic, the company has been able to generate income for the last-reported quarter. This was primarily driven by Barstool that has enabled the company to expand its online presence. However, the stock’s high valuation seems unjustified given its weak financials. As a result, I think, the stock is overdue for a price correction. 

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PENN shares were trading at $114.75 per share on Tuesday morning, down $3.07 (-2.61%). Year-to-date, PENN has gained 32.86%, versus a 3.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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