Should Investors Buy Penn Stock in May?

Casino and racetrack operator Penn National Gaming (NASDAQ:PENN) will report its first-quarter earnings tomorrow. Year-to-date, PENN stock is down about 38%. However, that decline tells only half the story. On March 18, it hit a 52-week low of $3.75. Now the shares are hovering around $15. So in the past six weeks, PENN stock is up an eye-popping 300%.

Without the Return of Sports, PENN Stock Is as Good as Done

Source: Jeffrey J Coleman / Shutterstock.com

If you do not currently own PENN stock, you may want to wait until you have analyzed its upcoming Q1 earnings to have a better appreciation of the full effects of the Covid-19 pandemic on its business. The company’s stock price is likely to be volatile in the coming days.

PENN Stock and the Pandemic

The company, which has a market cap of around $1.8 billion, “operates or has ownership interests in gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment… It also offers social online gaming through its Penn Interactive Ventures division.”

On March 13, amid the beginning of the coronavirus outbreak,  Penn’s management suspended its operations in Ohio and Illinois as required by the local authorities there. And the company took similar action in all of its 41 properties in 19 states. As a result of those closures, Penn is currently not generating any revenue.

According to the American Gaming Association, as of the end of March, all of the 989 commercial and tribal casinos in the U.S. had closed their doors. It may still be too soon to say how most casino operators will deal with the sector’s uncertainty in the coming months.

In a late March press release, Penn CEO Jay Snowden stated “like many others in the gaming and hospitality sector, we are making difficult decisions to help preserve our liquidity and ensure a brighter future for our Company’s team members, customers, shareholders and other key stakeholders.”

The company started implementing unpaid furloughs for around 26,000 of its employees on April 1. It also withdrew the 2020 financial guidance it had provided earlier in the year.

At this point, health-related concerns are still quite high across the country. Each state is providing updates as to  when  and how it plans to reopen its economy. Penn derives no more than 15% of its revenues from any single state. Thus, its management believes that it is “well- positioned to benefit from a state-by-state phased-in approach.”

We are likely to get more detailed guidance on Penn’s results  for the rest of the year when it reports its earnings tomorrow.

What To Expect From Penn’s Q1 Earnings

In Q4, Penn’s revenue surged $186 million versus the same period a year earlier to $1.34 billion. The results also showed a net loss of $92.9 million, compared to a net loss of $42.0 million in the previous year.

The company’s Q1 numbers will no doubt reflect its difficult situation. Penn’s monthly cash burn is currently around $83 million. As of March 31, it had approximately $730 million of cash and cash equivalents on its balance sheet. Therefore, Penn could survive even if its casinos stay closed for the rest of the year.

Investors’ reaction after the quarterly call will be based both on the Q1 numbers and management’s commentary on the effects of the pandemic.

Therefore, if you don’t already own PENN stock, you may want to wait before buying the shares. While long-term investors would like to see the stock price reach, exceed and stay over $20, short-term traders may push the stock toward $10.

Those investors who own PENN stock and already have paper profits may consider taking some money off the table prior to the company’s upcoming earnings report.

Alternatively, those who have experience with options may want to initiate a covered call position. For example, a June 19-expiry at-the-money covered call would help decrease the volatility of a position in PENN stock. The option would also enable you to participate in an up move while providing some protection against a decline in the shares.

If the lockdowns drag on well into the summer, then the worst may not necessarily yet be behind Penn.

The Bottom Line on PENN Stock

For long-term investors, it’s still too risky and early to commit new money to the shares of casino operators like Penn. We do not yet know when some states and their casinos will reopen or what type of a recovery the casino sector will have. It may be several quarters before management builds the company’s business back up. In the meantime, the share price could come under further pressure.

Put another way, investors may find that there are other, better stocks to play a potential rebound in our economy. But if you have some spare capital to risk, then you may consider taking a gamble on Penn’s shares.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.


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