Penn National Gaming Offers Good Value for Patient Investors

Penn National Gaming (NASDAQ:PENN) is a very interesting stock. At today’s price, PENN stock represents great value for patient investors.

PENN Stock Offers Good Value for Patient Investors

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The main reason I like this stock is that its earnings and cash flow power are very high compared to its market capitalization today. For example, in 2019, Penn National Gaming generated over $514 million in free cash flow (FCF). But its market cap is just $1.64 billion today. So its price-to-free-cash-flow ratio is just 3.2 times, a very low number.

In other words, when Penn National gets to open up its 41 casinos and other gambling properties, it will have the ability to start generating significant FCF. Once that FCF approaches the 2019 level, an investor at today’s price will likely make money. The stock will rise close to its former heights, since it is too cheap at 3 times FCF.

Penn National’s Moves to Conserve Cash Are Very Timely

Penn National announced on March 27 that it had reached an agreement with its real estate investment trust (REIT) landlord, Gaming and Leasure Properties (NASDAQ:GLPI) to provide financing. It agreed to do a sale and leaseback for one of its properties that provided $337.5 million in rent credits.

This effectively saves the company some cash outflow over the three months. For example, Penn National normally spends about $313 million in operating expenses each quarter, including salaries. This amount does not include depreciation or capex outflows.

So you can see that not having to spend $337.5 million in rent helps reduce that operating burn rate. Penn National only had $437 million in cash on hand at the end of December. I estimate that, given its annual FCF of $514 million, its cash balance may have increased slightly to over $700 million before it suspended operations on March 17. In fact, on April 20, the company said, in an 8-K filing with the SEC, that its March 31, 2020 cash balance was $730 million.

If Penn National Gaming reopens its operations by the end of May and fully re-opens by mid-June, it will have had just three months with no incoming cashflow. I estimate that it has enough cash and cash flow to survive during that period.

For example, Penn National put most of its employees on furlough starting in April. That lowers the cash burn rate below my estimate of over $300 million per quarter. In fact, on April 20, the company said in the 8-K filing that its monthly cash burn was just $83 million per month. This includes its expected expense in April. To be conservative, I estimate that the monthly average will likely be closer to $100 million per month.

What’s Next With Penn Stock?

Penn National will announce its Q1 earnings before the market opens on May 7. Investors should tune in to see what its present cash balance is and if the cash burn rate is less than $100 million per month. They should also see whether the cash burn has been lower in the past month. If so, I suspect the company has plenty of liquidity to survive.

In that case, I think PENN stock is probably a pretty good bargain here. As I pointed out above, it is effectively selling for a little over three times its FCF rate at the end of last year. That is very cheap, especially if the company can re-achieve that level of cash flow.

Penn National’s Long-Term Outlook

Penn National had a confident statement regarding its long-term outlook. It is “well-positioned to rebound with the nation’s largest and most broadly diversified portfolio of 41 properties in 19 states and an opportunity to gain a foothold in our 20th state with the Hollywood Casino Perryville option.”

The company also talked about its new digital mobile sports betting product, Barstool Sports. Penn National recently paid $135 million in cash and $28 million in non-voting convertible preferred stock for a 36% stake in Barstool.

Forbes magazine called this an”ultimate win-win” deal. Penn National has the ability to buy 50% control in three years for $62 million. It can also then increase its stake to voting control or full ownership. The Wall Street Journal said Penn National hopes to convert the Barstool Sports 62 million blog readers into digital gamblers. In its letter to shareholders on the 8-K Penn National said it was rolling out a mobile sports gambling app in Q3.

I suspect that will be a good thing. Penn National is one of the first-movers in this huge new gambling market. It was opened up by the Supreme Court’s decision in May 2019, allowing New Jersey and other states to legalize sports betting. Penn National’s product will be one of the few national sports betting apps to come out. That will help the company to diversify away from sole dependence on its land-based casinos.

Look for PENN stock to do well over the next several quarters. Given its huge free cash flow power and cheap price, the stock will likely rebound as its casinos reopen.

 Mark Hake runs the Total Yield Value Guidewhich you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial. As of this writing, he did not hold a position in any of the aforementioned securities.


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