Stock of the Week

Penn National Gaming

September 15th 2020

Penn Natl Gaming
Nasdaq Symbol: PENN
Industry: casino/online gambling
Price as of 9/11: $59.19


September is historically the worst month of the year. Entering the month, the major averages have started to correct following a historic rally out of the bear market this spring. In just three days last week, the Nasdaq corrected 10%. The Dow has corrected 5% while the Nasdaq has declined 6%. The biggest declines are coming out of the highflying techs and other stocks that have benefitted from COVID-19. The coronavirus pandemic is changing the US economy and accelerating businesses' move to online. Business meetings have moved online while retail is also accelerating its move online. This week we will highlight another business moving online. This week we will feature casino operator and online gambling firm, Penn National Gaming. Penn National's stock corrected sharply this spring as their physical casinos were closed to stop the spread of COVID-19. However, since then Penn National has started to open some of their physical casinos while also shifting business online with the acquisition of Barstool Sports. With the start of the NFL this week, analysts are warming up to the stock expecting more upside for Penn National in the coming years as more of the $150 billion gambling business moves online and becomes legalize in more states that are sorely in need of more tax revenue.

In the second quarter, Penn National Gaming reported disappointing earnings as the company lost $1.69 a share while sales fell 76% to $305.5 million. Hopefully, this will be a low point for Penn National. Since then, the company has reopened 39 out of 41 casinos with 50% capacity. But the real catalyst for growth is coming from the investment into Barstool Sports to become their exclusive gaming partner with the sole right to utilize the Barstool Sports brand for all of its online and retail sports betting and iCasino products. This week Penn National with launch the Barstool Sportsbook App in Pennsylvania. 

The analyst at Rosenblatt Securities upgraded Penn National Gaming this past week expecting the company to gain significant market share in the online sports betting market at or above peer margins driven by their Barstool partnership and physical footprint. The key point is that Barstool has a wide reach in an important demographic for sports betting with an engaged and growing user base. Barstool reaches 48% of millennial and Gen X men, which covers a key young male demographic that typically bet on sports.

Valuing Penn National's stock is tough as the company restarts operations following the pandemic shut down. Based on 2021 projections, Penn National trades for less than two times sales as revenue is expected to rebound over 30% as the company moves into the black once again. The company is leveraged with nearly $12 billion in debt and $1.24 billion in cash so Penn National is not a conservative investment, but if the trend continues for states to legalize more online gambling, Penn National is well positioned to capture market share according to the Rosenblatt Securities analyst. His price target is $80 a share or 35% above current levels. However, the same analyst has an eye opening $300 price target or five times current levels if Penn National can become a market leader, with 33% market share.

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