Penn National Gaming (NASDAQ:PENN) is up nearly 40% in the last 30 days. This is welcome news to investors who watched as PENN stock fell nearly 90% in the period between February 20 through March 20.
Investors are obviously encouraged by the fact that Penn National, and other casinos, will receive a lifeline from the federal government. But a recent Macquarie Research report showed that Penn is burning through cash at a rate that would only keep the company afloat for five months.
Prior to the coronavirus pandemic, PENN was building a nice poker hand. They had an “asset light” infrastructure that was allowing the company to collect rent on many of its various properties. And a new agreement with Barstool Sports was giving the company an important foothold in the lucrative sports betting industry.
But investing in casino stocks is always a gamble (no pun intended). When the economy is booming, these stocks can move higher than the market. But when the economy is in a downturn, casino stocks usually drop more than the broader market.
Right now, PENN stock is like the poker player who needs one card to fill an inside straight. But unfortunately, the odds for the inside straight may be better.
The New Normal Requires Answering What and When
If this was a “normal” recession, we’d have a deeper playbook for what the future looks like. However, this is far from normal. Everyone is wondering when the economy will reopen. But whenever that is, it is clear that the recovery will be phased in. Undoubtedly, a casino will be one of the last facilities to come online.
And that presents two concerns for PENN stock.
The first concern is the company’s asset light approach to the casino properties they operate. The company is more of a real estate investment trust (REIT) than a casino. But this means they have lease liabilities. And as InvestorPlace contributor Matt McCall wrote on April 3, Penn National has $8.5 billion in lease liabilities on its balance sheet. And of that number, $900 million in lease payments are due in 2020.
If this were a normal recession, the company would still have revenue coming in the door. That demand is gone. And that’s the major concern of the moment. But it’s not the only one.
The second concern for Penn is the absence of live sports. The company recently entered into an agreement to acquire a 36% stake in Barstool Sports, a leading digital sports media company. Penn National will now be the exclusive gaming partner for up to 40 years. In addition, Penn can use the Barstool Sports brand for all of the company’s online and retail sports betting and iCasino products.
Timing is everything. And in the case of Penn, the timing of the announcement couldn’t have been much worse. At the end of January, sports betting was heading towards its main event, the Super Bowl. But sports betting is a year-round industry. That is, until it’s not. And that’s the problem we have right now.
Without live sports, having a sports betting lifeline such as Barstool Sports, is like the poker player who is looking for an inside straight. Penn National Gaming has the infrastructure for gamblers to place bets. They have a link to give gamblers the information they need to place informed bets.
But they don’t have actual games for gamblers to gamble on.
Stay Away from Penn Stock for Now
I’m not part of the gloom and doom crowd. And I believe there is an underestimation of the pent-up demand that is building up. I agree with Matt McCall who recently wrote about the resilience of Las Vegas when it comes to recessions. And I believe the same will be the case after this pandemic.
However, the company has another way to get to the outcome they need. If the country can find a way to get live sports back again (even without fans), it will open up the sports betting industry. And while Penn doesn’t have a monopoly in that arena, it’s a space that’s big enough for a number of companies in this space.
But right now, the odds of either of those happening are looking more remote than those of pulling an inside straight. And that’s a gamble that no investor should be making right now.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
