Penn National Gaming (NASDAQ:PENN) stock has recovered a lot of lost ground over the last month after falling to record-lows in March due to the novel coronavirus pandemic.
The rally follows Nevada Gov. Steve Sisolak’s decision to ease lockdown restrictions in Las Vegas and other gambling hot spots in the state. People flocked to game houses on the first night of reopening, filling once empty casinos and their cash registers. The markets also rewarded this enthusiasm, driving share prices higher.
But among the major gaming players, Penn has to be the most interesting. In February, the gaming operator announced plans to acquire a 36% equity stake in Barstool Sports. The acquisition will lead to the company’s overall consumer base becoming younger and opens up a host of online growth opportunities.
Meanwhile, the company has gathered enough cash to survive the crisis. A long-term concern for the company is when we will see a full-fledged reopening of casinos worldwide, particularly in Macau. Until that happens, the company’s cash flows will remain stressed.
Lastly, the company’s well-diversified portfolio also gives it a key advantage in comparison to other gaming operators in the country.
Barstool Deal Is a Big Boost for Penn Stock
Penn’s acquisition of Barstool comes at a price tag of $163 million, a figure that may seem high at first. But I believe it’s an important strategic step to gain a more significant foothold in esports. Barstool has a younger, male-dominated demographic that is considerably different from Penn’s older and female-focused one.
The platform boasts 66 million monthly unique visitors and greatly enhances Penn’s presence in the world of online betting. By 2025, online gambling is forecast to reach $102.97 billion, registering a CAGR of 11.5% from 2019 to 2025
It’s also important to note that Covid-19 will lead to a substantial increase in these numbers moving forward. Although several states are lifting their lockdown restrictions, social distancing rules will remain in place until we have a vaccine. That means online betting will continue to pose a significant threat to brick-and-mortar focused gaming companies.
Penn’s acquisition of Barstool allows the company to tap this market for growth and take advantage of a consumer set that is roughly 65% millennial and Gen X. An important point to note is that Penn has the option to increase its stake in the company to 50% as part of the overall deal. If exercised, this option will give Penn greater control and make strategic decisions regarding the platform’s future.
Enough Liquidity to Survive a Prolonged Slowdown
Even though several gambling dens are now open, the numbers are not as they once were. That’s understandable since many are still scared regarding the virus and want to protect themselves by avoiding crowded places. In such an environment, gambling companies will need to shore up their cash reserves and make sure they have enough to survive a prolonged slowdown.
In that respect, Penn has its bases covered, but it has come at a cost – shareholder dilution. The company recently completed a public offering of common and convertible stock that netted between $600 and $690 million.
Considering that the monthly cash burn stands at $83 million, the company has more than enough funds to survive the crisis. However, the company’s reliance on equity markets will lead to substantial dilution for existing shareholders, and that’s not counting the convertible stock.
PENN’s Portfolio Is Diversified
Penn National does not rely on any single state for more than 15% of the company’s revenue. In contrast, MGM Resorts International (NYSE:MGM) has a property portfolio highly focused on the Las Vegas Strip. That makes it more susceptible in comparison to gaming companies like Penn that have properties spread over the country.
Although cases were reported all over the U.S., the Northeast and West Coast were hit the most during this pandemic. In comparison, the Midwest and South weren’t as badly hit; Penn has properties in both these regions. There are already signs a second wave of Covid-19 is upon us. If that is so, a well-spread out portfolio is an advantage that only a handful of gaming companies will have and Penn is one of them.
Final Word on PENN Stock
PENN stock is an interesting play. Although it has covered a lot of ground since the start of the pandemic, many are still skeptical of investing in a company that relies so much on social gatherings. However, since the beginning of the pandemic, the company has boosted its liquidity, while the Barstool acquisition will give it a critical strategic advantage moving forward.
Although it will take time for casinos to return to pre-pandemic levels, Penn is in a strong position to benefit once the specter of Covid-19 ceases to haunt the markets.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.