Back in April, I held a bearish outlook on Penn National Gaming (NASDAQ:PENN). At that time, casinos were still closed and the return of live sports seemed very cloudy. However, many investors did not agree with me, and they’ve been rewarded. PENN stock has nearly doubled in the last month.
The primary catalyst has been the company’s casino business, which is slowly starting to reopen. I’ll admit the gain in the stock is impressive, but jumping out to a first quarter lead isn’t the same as covering the spread. And that’s why, though I like the long-term outlook for Penn National Gaming, I think investors are getting ahead of themselves.
Demand Will Still Take Time to Emerge
If there was a prop bet on the number of times the words “pent up demand” would be used in the media over the last 10 weeks, I would certainly bet the over. Alas, casinos aren’t open in my home state of Michigan, and it doesn’t appear they will be opening anytime soon.
Fortunately for Penn, Michigan doesn’t matter to them. The company’s stock popped after they reopened casinos in Louisiana and Mississippi, representing about 25% of the company’s portfolio.
But the states that are really critical for Penn National are Ohio, Illinois, Pennsylvania and Nevada, of course. But those states have yet to green-light casinos for reopening.
Still, Penn has a good geographic balance. According to CEO Jay Snowden, the fact that Penn doesn’t derive more than 15% of its revenues from any one state will be a benefit.
I believe that there will be strong, albeit socially distanced, demand at casinos. But the very nature of social distancing will put a curb on revenues.
Still, as long as the company can get a slow, steady opening there will be revenue coming in the door. But does that revenue justify a nearly 100% increase in PENN stock?
As InvestorPlace colleague Thomas Niel points out, Penn has an asset-light approach that means it leases most of its properties. And the company is on the hook for $900 million in lease payments this year, despite properties being completely shut down for two months.
Live Sports is Still the Key
If there’s anything that Korean baseball and charity golf outings are teaching us, it’s that there is still huge appetite for live sporting events, and for betting on them. Last February, Penn purchased a 36% equity stake in Barstool Sports. And Penn has an agreement to increase its ownership stake to 50% in three years, with exercisable options that could lead to Penn becoming a full owner in the future.
The major benefit for Penn is access to Barstool’s 66 million monthly active users. This will allow the company to become a significant player in the sports betting business.
Fast forward to March of this year, and this deal looked ripe to pay off big. The company had the NCAA Men’s and Women’s Basketball Tournaments (i.e. March Madness) in its sights, and both the National Basketball Association (NBA) and National Hockey League (NHL) playoffs on the horizon. Not to mention Major League Baseball (MLB) and its fantasy sports implications.
After several weeks of uncertainty, we now have greater visibility into when at least a few of these sports will be starting. But it’s unlikely we’ll see live games for at least a month still, maybe even longer. And that means revenue will be a challenge for the coming quarter.
PENN Stock May Not Have Much Higher to Climb
My InvestorPlace colleague Nicolas Chahine did a technical analysis of PENN stock. Chahine surmised, and I concur, that just as $4 was too low for the stock to drop, it’s unrealistic to expect the stock to climb back to $40. In fact, he claims that profit taking around $23 per share would have made a great play.
Of course, PENN stock is well past that point now. And that’s why I wouldn’t take the points with this fast-moving stock. The stock is climbing as if it’s business as usual, but it’s just not, and it won’t be true for quite some time. When you can only fill the house to 50% capacity or less, you can’t expect the revenue of a full house. And that’s I think investors jumping in now are making a sucker’s bet.
The problem with sucker’s bets is that the house usually wins.
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.