Penn National Gaming (NASDAQ:PENN) stock is in position to rise as a long-term investment. Broad macroeconomic factors including the continued development of the gambling and sports betting industry benefit the company. Taken in concert with reopening of the economy, which will jump start company revenue streams, factors look positive. Penn was forced to shut down its operations due to the novel coronavirus which effectively stopped revenues. So, it is very obvious why a reopening alone will translate to increased share price. But the stock is much more than simply one which will rise from a reopening.
PENN Stock Is Well Positioned
Barstool Sports should open up a powerful revenue stream for the company in the coming quarters and years. The company is a sports betting app website. And Penn controls 36% of Barstool’s equity with the option to increase that stake to 50% in the coming years. Investors see the synergy between the two companies, which positions Penn well in a high-growth industry.
Penn will benefit on several fronts. Firstly, sports betting attracts a younger demographic than casinos do traditionally. Barstool Sports has an audience reach of 66 million, of whom, 65% are 44 or younger. Further, 62% of Barstool’s audience bets on sports. The company diversifies its customer base and also now has a more commanding position in online casinos with Barstool Sports on board.
Diverse Operations and PENN’s Stock
Penn National Gaming has a geographically diverse revenue base. It has 41 operations across 19 states with none of them accounting for more than 15% of revenue individually. Diversified geographic operations help the company balance many things. One being legal implications, and another being the coronavirus.
Casino and gambling legislature varies from state to state. Penn National Gaming’s stock is well buffered against sudden legal changes that may occur within a given state. There is no over reliance upon any individual revenue source within any given state. So, should a state in which the company has operations decide to change its gambling laws, it can react nimbly.
A similar truth concerns coronavirus response on a state by state basis. As America reopens, there will be differences in how one state manages vis-a-vis another. PENN should see revenues climb steadily due to diversified operations. Although opening will not look identical across the U.S., Penn National Gaming’s diverse exposure should help its stock price.
Penn Gaming and Stock’s Valuation
Investors can use several methods to determine a given stock’s valuation. Their reasons to choose one over another vary, but importantly all seek to determine where the market should price a given stock.
InvestorPlace writer Mark Hake, CFA, spelled out a compelling argument that the market has undervalued Penn Gaming National in a recent article. Based on that valuation, he makes a compelling argument that Penn Stock has lots of room for price appreciation. I agree that it is a buy and hold stock.
Acquisitions Show in EBITDAR and PENN’s Stock
PENN uses EBITDAR in measuring its growth. By that measure, they have shown some success in their recent acquisition strategy. Following their 2019 acquisition of casinos in Detroit and Louisiana, EBITDAR grew in both cases. Growth was 6.3% in the 9 months post-acquisition, and 10.9% one year out (Louisiana), respectively. Further, EBITDAR has risen on an adjusted basis for the past 3 years.
PENN National Gaming will be looking for similar earnings growth to flow from the Barstool Sports merger. And as earnings rise, the stock will also rise.
Takeaway on Penn National Gaming Stock
The company has lots of upside. PENN stock’s primary downside is the same one which looms large for all stocks: a second wave of coronavirus. So, there aren’t many internal factors that should cause investors to shy away from PENN’s stock. They’ve weathered the coronavirus well, by diversifying their income stream with the addition of Barstool Sports. Since the stock is close to its 52-week high at its current price of $31.30, buy any dip. Because while it is near that high, there is reason to believe that the stock will rise higher. The Barstool Sports acquisition is a primary driver of that optimism. Investors should also consider a valuation which implies that the market is undervaluing PENN stock. The two can compound should the markets conclude that it is indeed undervalued, and should the Barstool merger pop.
Given the emergence of online gambling, and stocks therein which have risen quickly, there’s lots of room for optimism. Investors should take this all to mean that the future is bright for this stock.
As of this writing, Alex Sirois owned none of the aforementioned stocks.
