Penn National Gaming (NASDAQ:PENN) has benefited greatly over the past week from the move to reopen the country. As the company’s 41 gaming and racing properties in 19 states have started to open their doors to gamblers, PENN stock has gone through the roof.
Up 62% in five days of trading through May 20 — as I write this on May 21, it’s up more than 6% on the day due to renewed investor excitement over reopenings — I can’t help but think Penn’s move is indicative of an irrational market.
If you were fortunate enough to have bought Penn’s stock a week ago below $17, I don’t think there’s any question you should take profits if you do not intend to own its stock for the next three to five years.
Unless I’m missing something, this is a stock that’s come too far, too fast. Here’s why I feel this way.
Consider Its Latest Earnings
Penn reported its first-quarter results on May 7. On the top line, the company reported revenue of $1.12 billion in the first three months of the year, down 12.5% from last year, and 12.6% lower than analyst expectations. On the bottom line, it finished the quarter with 6 cents in earnings, 83% lower than a year ago, and 70% less than the consensus estimate.
CEO Jay Snowden addressed the first-quarter results by suggesting there were two entirely different periods.
First, there were the months of January and February, which were phenomenal. And then there were the last two weeks of March when all 41 of its properties were temporarily closed.
As part of its Q1 2020 earnings, the company took $616.1 million in impairment charges against goodwill ($113.0 million) and intangible assets ($498.5 million) due to the novel coronavirus and Covid-19. As a result, on a GAAP basis, it lost $5.26 a share.
“That momentum [January and February gains] was cut short in mid-March by the COVID-19 pandemic, which required the temporary closure of all 41 of our properties,” Snowden stated in Penn’s Q1 2020 press release.
Reopening of Its Casinos
On May 20, Penn announced that it was reopening 10 casinos in Louisiana and Mississippi, which explains the 6% surge on May 21. Specifically, the company opened five Louisiana properties on May 18 and planned to reopen five Mississippi casinos on May 21. It also said it would reopen its West Virginia properties on June 5.
“As the largest operator of casinos in Louisiana and Mississippi, we are excited and grateful to be able to reopen our doors and welcome back our team members and loyal guests to our facilities,” Snowden stated in Penn’s May 20 press release.
Slowly but surely, it’s getting back to business as usual. You can read about the social distancing and health and safety initiatives at the company website.
But will gamblers come back in record numbers given the health and safety initiatives required to be open? I don’t think so.
We do know that all casinos will have to operate at limited capacity, nowhere near their maximum potential. Yet, they’ll probably have to staff the facilities as if they’re at maximum capacity to ensure social distancing is being adhered to and health and safety standards are being met.
All of this means the second-quarter loss will make the first-quarter loss look like a walk in the park.
The Bottom Line on PENN Stock
I last wrote about Penn on April 23. At the time, I had concerns about its liquidity. As a result, I felt MGM Resorts (NYSE:MGM) was a better buy in the casino space. Not only did I have concerns about Penn’s ability to survive a lengthy shutdown, I felt MGM stock was a better buy from a valuation perspective.
Since then, MGM is up 16%, while PENN’s gained 114%. So, what do I know?
I will say this about Penn. The fact that it was willing to gamble $450 million on Barstool Sports suggests it’s not afraid to take chances. Sports betting could turn out to be a big deal for it in the years to come.
That said, a 114% increase in its share price in just four weeks, given the losses it will report in the second quarter, seems like it’s come too far, too fast.
For me, it’s too hot to handle.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.