Like so many gaming names, Penn National Gaming (NASDAQ:PENN) is rebounding in dramatic fashion. Off its March lows, PENN stock is higher by more than 600%.
A move like that in such a short amount of time could imply the easy money was already made and upside from here is limited. Investors, right to be apprehensive about Penn following that stellar run, may also ponder how much reopening fuel is left for this name and its gaming brethren.
About 70% of US casinos are now back in business following the Covid-19 shutdown and while some Penn National venues are still waiting to reopen their doors, other catalysts are needed from here to add to the aforementioned gains.
Fortunately, there are tailwinds available to spark more upside for shares of Penn. Let’s start with an often under-appreciated element of the story: the company’s status as a regional gaming company.
In U.S. gaming business, there are companies, such as MGM Resorts (NYSE:MGM), that are heavily dependent on Las Vegas. Then there are operators, like Penn, that have some exposure to Sin City, but derive the bulk of their revenue in other markets.
Penn operates two Las Vegas venues: the M and the Tropicana, the latter of which hasn’t reopened. Pay enough attention to gaming industry analyst and executive commentary and the reopening chatter and data heavily support the notion that regional properties are performing better than their Sin City equivalents.
On that note, there’s something else to consider about Penn’s lack of Las Vegas exposure: guests at Nevada casinos will now be required to wear masks due to recent uptick in novel coronavirus cases. It remains to be seen, but that could affect gamblers’ desire to hit the tables.
More Tangible Benefits
I don’t know what the impact of the Nevada’s mask mandate is going to be on visitation or share prices. However, other data points confirm that it’s a good time for investors to view Penn in a new light as a leaner, more technology-driven company.
Yes, land-based casinos are going to be integral to the Penn thesis for some time and that’s a cost-intensive business. The company has levers to pull to rein in costs, including selling real estate or the operating license for the Tropicana, among other avenues.
Additionally, the post-coronavirus environment is forcing gaming companies to run tighter ships, meaning reining in staff and marketing costs and trimming low margin accessories, such as buffets.
Evidence suggests there are tangible benefits to those strategies because analysts are saying margins at regional casinos are perking up following the recent reopenings.
Then there’s sports betting, a fast-growing market in which Penn’s potential should not be underestimated. Penn operates casinos in 19 states, nine of which allow sports wagering, but this is still a nascent business for the industry and the company itself.
At least three states where Penn has a presence – Colorado, Illinois and Michigan – launched sports betting right before or during the time when US sports were shut down because of Covid-19. That says as the domestic sports calendar normalizes, Penn is positioned to benefit. Focusing on Illinois for a minute, a state where Penn is the largest casinos, it’s common to hear sports betting experts say the Land of Lincoln will eventually be the biggest sports gambling market in the U.S.
The Bottom Line for PENN Stock
As if that’s not enough, there are more longer-ranging catalysts for Penn National. Other states where the company does business, including Louisiana, Missouri and Ohio, could approve sports betting this year. In fact, Louisiana, one of Penn’s biggest revenue markets, is likely to do so in the November elections.
Then there’s the move to online gaming, which appeals to younger bettors, an audience Penn is aiming to capture via its partnership with Barstool Sports. Penn owns 36% of David Portnoy’s company, a stake that cost $163 million, and can buy the whole entity for $450 million. That’s real money and those figures signal that Penn knows younger gamblers want to bet from their computers and smartphones.
One final point: the Covid-19 shutdown severely crimped states’ ability to generate cash from income, sales and other taxes. With so many now facing budget woes, expect more to at least consider approving internet casinos and/or sports betting to plug budget holes. Penn is exposed to both themes, indicating there could be some good timing that benefits the stock over the medium-term.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of Penn National Gaming.
