After Penn National (NASDAQ:PENN) rebounded 22% in the last month, PENN stock seems to be at least somewhat overvalued.
The shares now appear to be appropriately priced relative to the company’s near-term and longer-term positive and negative catalysts. But more chaos is likely to ensue for PENN stock, as the company is expected to report its first-quarter results on May 7, before the market opens.
Physical Casino Revenue Is Likely to Be Much Lower
When Las Vegas casinos reopen, Nevada’s regulators plan to allow only “a 50% occupancy limit for each gaming area.” The regulators also plan to enforce “social distancing on casino floors.”
Penn Gaming will probably have to follow similar rules at its casinos. As a result, even if the company only allows its highest rollers into its establishments, its top and bottom lines are likely to be way below previous levels after it reopens. Adding salt to the wound is the fact that, in January 2020, the company indicated that most of the people who visit its physical casinos are not young.
As long as the novel coronavirus continues to spread significantly, many people in their 50’s and older are going to travel much less frequently than they did previously. And even if Penn National enforces the social distancing rules described earlier, a majority of the older Americans who previously came to its casinos are likely to opt for less crowded, more outdoor-oriented activities like barbecues, beaches, parks, etc.
Meanwhile, a vaccine for the virus may not be available for the remainder of 2020 and at least some of 2021, so Penn’s performance in 2021 could also be less than stellar.
One analyst who is bullish on PENN stock, Noumra Instinet’s Harry Curtis, expects the company’s EBITDAR (Earnings before interest, taxes, depreciation, amortization, and rent costs) to “turn gradually positive through 3Q as casinos reopen with lower revenue, but also much reduced operating costs.” He adds that the company should generate a “small” profit by Q4.
In 2019, Penn National reported net income of $44 million, and for most of the year, the price of PENN stock was between $18 and $20 per share. Thus, if Penn’s net income in 2020 and 2021 drops to, say, $5 million and $30 million, respectively, it’s hard to argue that the company’s stock price should be above the $12 to $15 level.
Questionable Outlook for Penn’s Digital Businesses
Discouragingly for those who are bullish on PENN stock, Seeking Alpha reported on April 20 that the company “expects its digital businesses to deliver meaningful revenue and profit contributions in 2021 and beyond with the help of the Barstool Sports property.”
In other words, Penn National doesn’t expect its digital revenue to make a significant contribution to its top and bottom lines this year. And if its digital business does not move the needle this year, when so many Americans will have been trapped at home for a month or two, it’s hard to see how the business will set the world on fire for Penn next year.
Moreover, I think the company’s strategy vis-a-vis Barstool Sports, the digital sports media company in which it took a 36% stake in January, is questionable.
Specifically, according to CNBC, Penn is “hoping [its partnership with Barstool] lures younger gamblers into its retail and online offerings.” But online sports gambling is only legal in 14 states, and Penn is facing significant competition from more established gambling websites/apps like the offerings from DraftKings (NASDAQ:DKNG) and FanDuel.
Furthermore, the extent to which Penn can convince a large percentage of Barstool’s younger, sports-oriented crowd to visit its casinos is highly questionable. According to The Wall Street Journal, “In New Jersey, about 84% of $4.58 billion in sports wagers last year were placed online.”
The Bottom Line on PENN Stock
Even an analyst who is bullish on PENN stock expects the company’s profit to be anemic in Q3 and Q4. And I think the 2021 outlook of the company’s core physical casino business is highly uncertain.
Meanwhile, although Penn’s sports betting business has strong potential, it is limited by the fact that online sports betting is only legal in 14 states. Furthermore, Penn will have to go up against more established players in the space.
Given these points, I would only recommend buying PENN stock at prices below $12 at this point. And I think those with meaningful paper profits on the name should sell their stakes.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.