Is Penn National Gaming Stock A Buy?

Is Penn National Gaming Stock A Buy?  Because of the Covid-19 pandemic, gambling companies like Penn Gaming have been hemorrhaging cash at an unprecedented rate, instead of raking in the green stuff.

In fact, the contagion has had a devastating effect on the casino stocks with Lady Luck eluding them like never before.

Other gambling companies have fared no better, with reports of MGM Resorts [NYSE: MGM] and Boyd Gaming [NYSE: BYD] reportedly losing millions of dollars per day.

Long term investors, too, found themselves at the short end of the stick, with Las Vegas Sands [NYSE: LVS] and Caesars Entertainment [NASDAQ: CZR] suffering over 50% erosion in stock value since the chaos began.

However, once the lockdown begins to ease and optimism rise over the successful development of a vaccine, analysts believe Penn Gaming has the potential to head north at an accelerated pace.

With the Covid pandemic sending shockwaves through the economy, states across the US have started to regulate sports betting, hoping to derive some tax revenue from the transactions in the process.

With sports gambling getting the official nod, stocks of gaming companies like Penn, with its impressive growth platform, could be an ideal choice for investors wanting to get into the action.

Penn National Gaming Owns 43 Casinos So Far..

Penn National Gaming, Inc. [NASDAQ: PENN] is an American operator of casinos and racetracks with ownership interests in 43 casinos, riverboat gaming, racing facilities, and video gaming terminals operations with a focus on slot machine entertainment. Many of its properties operate under the Hollywood Casino and Argosy brands.

Other facilities include the Tropicana on the Las Vegas Strip; racetracks (for horse racing and greyhounds) in Florida, New Jersey, and Texas; and riverboat and dockside casinos mostly in the Midwest and the South.

Its Penn Interactive Ventures offers online gaming as well. The company also controls a 36% stake in Barstool Sports. Penn Gaming was founded in 1982 and is headquartered in Wyomissing, PA.

Is Penn National Gaming Stock a Buy?

Penn National Gaming [NASDAQ: PENN] had an outstanding start to the year, with record-breaking results in January and February.

The company’s introduction of retail sports betting at several properties served as a catalyst for both, gaming and non-gaming revenue, driving up its stock price to an all-time high.

Unfortunately, things started going downhill from March 2020 as the contagion took hold and forced closures of businesses across the country.

As a result, first-quarter revenues fell $166.5 million year over year to $1.12 billion. Penn National Gaming also reported a loss of $608.6 million, whereas it had generated a profit of $41 million in the same period a year before.

Despite the setbacks, the company’s long-term growth strategy remains intact. Here’s a list of important reasons why Penn Gaming could be an ideal choice for investors with interests in gambling stocks.

Resumption of Sports

Organized sports were halted in the country to limit the spread of the novel coronavirus. But, they are eventually going to return and bring back their audience.

Also, with outdoor activities severely limited, recently held major sporting events like NPL, UFC, NASCAR and professional golf leagues enjoyed record viewership, with significant upswing in wagering activities.

All this would be like sweet melody to Penn’s ears as they are a source of high-margin revenue for all legal gambling entities.

With sports books in every Penn National Gaming casino property, and the company making considerable investment to shore up its sports gambling platform, the casino operator stands to significantly benefit from the resumption of live sports.

Barstool Sports App Could Help Penn National Mint Millions

Penn National Gaming acquired 36% stake in Barstool Sports for $163 million in cash and stock. By 2023, the company is expected to increase its stake to 50% by paying an additional $62 million.

This is a fantastic move by Penn National Gaming for two reasons. One, Barstool is one of the biggest and most prominent sports and pop culture blogging venture for gamblers in the country, with a coveted audience base of over 65 million millennial sports fans that is growing at a heathy pace.

More importantly, Barstool views on social media have soared more than 50% since April 2020, which is indicative of high level of audience engagement.

Penn will have its Barstool (sports betting) app running by the third quarter, under the name Barstool Sportsbook to leverage the mammoth following the sports and pop culture blog enjoys. Gamblers can access the platform online or do so in person at a Penn National gaming facility. This partnership will help Penn National advance its market share in an immensely competitive landscape dominated by heavyweights such as DraftKings and MGM.

A Well-diversified Gaming Portfolio

The company, in its first-quarter earnings release, made it a point to bring to notice its diversified financial exposure. Penn stated that it stands to hugely benefit from the “nation’s most diversified regional gaming footprint.” This holds absolutely true for Penn as no state in the country contributes more than 15% of the company’s revenue.

It is a real blessing for the casino operator as it frees the company from the burden of leaning too heavily on few specific states for a larger chunk of its revenue.

A dip in one market can be offset by positive results from other markets, which means the company is better positioned to endure its losses if natural disasters, political turmoil or a pandemic forces a region to close temporarily.

For example, the pandemic caused more disruptions in the Northeast and West Coast in comparison to other parts of the country. These types of arrangements, where a company’s assets are spread out, bolsters investors’ confidence by several notches.

The sector received an additional shot in the arm from Nevada Gaming Commission’s approving guidelines to reopen Las Vegas again soon.

The new guidelines stipulate that casinos will be limited to 50% occupancy and conventions to 250 people. An exact timeline for reopening has not been mentioned yet, but it has at least revived hopes that they’ll reopen sooner than later.

Additionally, Penn National’s Las Vegas properties are downtown, not on the Strip. This is another plus for the company as it relieves it of the burden of relying on air traffic to drive its business.

Regional customers, not reliant on air travel as such, are more likely to visit Penn National’s Las Vegas properties, a trend which has helped the company limit its losses, amidst a plunging preference for air travel.

Risks of Investing in Penn National Gaming

Desperate times call for desperate measures and this holds absolutely true for Penn Gaming.

With the raging pandemic enforcing lockdown across the country and ruining businesses, the casino operator was forced to sell the iconic Tropicana to Gaming & Leisure Properties Inc. for just $307.5 million, a property which it had purchased for around $360 million five years ago.

The signs are ominous, with experts predicting it could be a harbinger of more troubling times ahead for the casino industry. In recent years, a few big names in the industry, including Penn National, spun off their properties to real estate investment trusts.

This, in turn, saddled them with a liability they never had to deal with before – rent. Now, with the pandemic shuttering businesses, relationships with the new landlords are coming under closer scrutiny.

Devoid of customers, casino operators have been desperately looking for new measures to cut costs as well as tap credit lines. These, however, are short-term measures which may prove ineffective in the larger scheme of things.

The next steps, experts believe, could be more asset sales and debt restructuring, and the Tropicana deal is a pointer towards that.

Penn Gaming, in fact, is credited with pioneering the idea of creating a real estate investment trust (REIT).  In 2013, the company spun off most of its real estate as well as its debt to Gaming & Leisure Properties Inc, a corporate spin-off of Penn formed in 2013. It pays that company rent for the casinos it runs.

The idea found favor with other big shot casino operators and, soon, Caesars Entertainment Corp. and MGM Resorts International followed suit with REITs of their own. This structure of owning casinos and leasing them back to operators made casino deal making extremely popular. But all these dealings and spin-offs also gave birth to a lot of liabilities.

The company went off on a purchasing spree and, today, Penn National owns or manages 43 casinos, riverboat gaming, and racing facilities. Unfortunately, at present, all have downed their shutters because of the pandemic.

The company’s long-term debt and lease obligations have skyrocketed to $11 billion, an unprecedented occurrence in the company’s history.

Last year alone, the company had to dole out around $870 million as rent payment. Business closures around the country have forced Penn to withdraw its 2020 financial estimates. The company also announced that it was sending 26,000 employees on unpaid leave.

Are Penn National Gaming Competitors a Threat?

Penn National Gaming’s top competitors include Playtika, Wynn Resorts, NextGen Gaming, Zynga, Caesars Entertainment, Boyd Gaming, and MGM Resorts, among others.

Over the years, Penn National Gaming has been steadily gaining ground against some of its biggest competitors across the gaming industry.

The success of Penn cannot be attributed to any one mega project but a series of shrewd acquisitions and financial strategy over the years.

Its recent purchase of 36% stake in Barstool for $163 million in cash and stock has further consolidated its power in the regional gaming market.

Penn National, in fact, was the first major gaming company to launch a REIT, known as Gaming and Leisure Properties Inc [NASDAQ: GLPI], which has acquired most of Penn National Gaming’s real estate.

The formation of REIT has taken real estate assets off Penn National’s balance sheet, in the process giving it more operating leverage.

Is Penn National Gaming Stock A Buy: The Bottom Line

A diversified gaming footprint, 50% stake in Barstool Sports and return of major sporting events augurs well for Penn’s stock.

The pandemic, no doubt, is a serious impediment, but some sanity will eventually be restored and Penn has the staying power and value to cash on that.

The company got the much-needed cash recently, initiating a successful $500 million convertible notes raise to bring its cash position over $700 million. The interest rate of 2.75% is miniscule compared to the 10% some of the cruise companies are being forced to dole out.

The company is burning cash at the rate of $83 million a month with no sales worth mentioning. With the current amount of cash t its disposal, it means the company has a cushion of nine months before the cash runs out.

However, experts believe that a rebound could occur much sooner than that. Penn recently announced a reopening of 25% of its regional gaming assets; Las Vegas casinos also opened with certain restrictions.

Additionally, more openings are expected in the coming weeks.  Based on this, there is no possibility of the company going without any income generation for a lengthy period of nine months which, again, attests to its staying power.

The gambling industry, undoubtedly, is currently going through a deep crisis. But things are definitely going to improve and, when that does happen, Penn is surely going to reward its investors.

With its gaming and gambling facilities at the right places, and a stake in Barstool sports to shore up its sports betting and entertainment offering, long-term prospects of Penn Gaming remain intact.

Additionally, with nearly 40% of U.S. adults currently betting on sports, legal sports betting is a big multibillion-dollar business, which makes Penn Gaming a very lucrative prospect.

In all probability, business is unlikely to be like it was in the pre-pandemic era, but big signs of recovery are already visible on the horizon. This is the best time to pick diamonds in the rough and invest in casino stocks like Penn National Gaming.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.