Penn National Gaming (NASDAQ:PENN) is a small casino operator with big ambitions in online gaming. The ambitions are reflected in its 36% stake in Barstool Sports, a sports blog building a sports betting app. What John Maynard Keynes described as the market’s “animal spirits” are reflected today in PENN stock.
In 2020, when people are feeling good about the economy, they pile into Penn National stock.
In February it peaked at $39/share, and nearly hit that level again in early June. When people are feeling down, they sell Penn National. The shares have traded below $7 this year and have suffered two down moves of over 10% just this month.
Penn National is the ultimate “Dirty Harry” stock. Feeling lucky, punk?
The Bull Case for PENN Stock
What the bulls see in Penn National is its potential sustained by cash flow.
Penn National has brought in $5.1 billion of revenue in the last year and had $1.1 billion in the March quarter. It’s only nominally profitable but generated $843 million of operating cash flow in 2019.
Penn National spent $450 million for a 36% share of Barstool in January. Barstool founder Dave Portnoy has since been all over TV like a wrestling promoter, talking up a rivalry with DraftKings (NASDAQ:DKNG) and Flutter Entertainment (OTCMKTS:PDYPY). Many of Flutter’s betting parlors go by the name Paddy Power.
Portnoy acts like online sports betting is a huge business in the U.S. The fact is it’s only legal in 7 states and not all are operating. Most states that allow sports bets only do it in casinos. Regulation is a patchwork, but bulls expect a flurry of legislation next year, as states try to patch holes in their budgets created by COVID-19.
Penn National started with horse racetracks (where you sit down right on the horse). It began buying casinos, mainly in the south, 20 years ago. Its best known property is Las Vegas’ Tropicana but it has 38 in all, most with names like Hollywood Casino, Boomtown and Ameristar.
The Bear Case Against Penn National
Bears see a small casino operator punching above its weight.
Penn National’s market cap today is about equal to its 2019 revenue. MGM Resorts (NYSE:MGM), by contrast, sells for just two-thirds of its 2019 revenue. Penn National’s premium valuation is based on the sports book.
DraftKings has a market cap of $13.25 billion, about 40 times its 2019 revenue. It also has a scaled technology partner to operate sports betting. Flutter, which operates in Europe, has one too. Flutter has a market cap of about $21.7 billion, twice that of DraftKings, with 2019 revenue of $2.1 billion.
Penn National’s online action is being handled by Kambi, a European operator owned by Unibet, a Swedish company worth about $1.2 billion. It has arrangements with DraftKings as well.
It’s the size and profitability of the U.S. online sportsbook, and Penn National’s ability to gain market share in it, that worries the bears. Penn National has been reopening its casinos aggressively, and COVID-19 has responded by spreading aggressively. Penn National’s near-term fate is tied up in the casinos, as our Thomas Niel notes. The sports book is all speculation.
The Bottom Line
When times are good and money flowing, casinos can be a cheap night out.
But times are not good right now, and money is not flowing. Penn National’s re-opening efforts look doomed to fail as COVID-19 cases continue to spike.
The sports betting bonanza may not be as big as Penn is playing it, either. Flutter is scaled and active, but only does $2 billion in business a year. That’s less than half of Penn’s handle in its casinos.
Even if you want to be in Penn National, you might want to wait a few weeks and see how bad the latest outbreak is. Let the virus be your guide, and don’t get in until you see it receding.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
