Penn National Shares Are Set for Higher Returns

Penn National Gaming (NASDAQ:PENN) has been on a tear. Since my last two articles in both June and July, PENN stock has basically doubled. However, I now believe PENN stock still has much more upside to go.

Penn (PENN) National Gaming logo on the website homepage.
Source: Casimiro PT /

I previously argued that it was worth no more than $54 to $59. But as of Monday, Oct. 26, the stock was at $60.11. But that was before the company not only raised almost $1 billion but also provided clear guidance for its third-quarter financial performance.

On Sept. 29, the company announced it had sold 16.1 million shares at $61 per share. This brought in $982 million for the company.

Financial Improvements In Q3

Moreover, Penn National reported that its Q3 revenues would likely range between $1.04 to $1.145 billion. By contrast, last quarter the company had sales of just $305.5 million.

In addition, the company provided a cash flow forecast. Using a term called EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent), the company estimated Q3 EBITDAR of between $410 and $450 million. According to Penn National’s slide presentation accompanying the offering, the consensus analyst forecast was for just $310 million in EBITDAR.

Moreover, the slides show that its EBITDAR has increased by 18% for Q3 through Sept. 21 and the margin has risen by more than 1020 basis points (i.e. 10.2 percentage points). That is a significant increase.

Although the full Q3 numbers are not going to be released before Oct. 29, I believe these numbers will result in positive free cash flow (FCF). Last quarter Penn National had negative $130 million in FCF.

Valuation Estimates

If the company returns to positive FCF, I believe that this will be a significant catalyst for PENN stock over the next year. For example, if it produces $500 million in FCF, that would represent more than 4.76% of its $10.5 billion market capitalization.

If analysts project that it could reach $700 million in FCF in the next year, that would be an FCF yield of 6.67%. A more appropriate yield would be between 3.5% to 4.0%, as this is still higher than most dividend yields.

That implies the market cap should be between $17.5 to $20 billion. This means a stock market gain of 66.67% to 90.5%. In other words, PENN stock is worth between $100 to $114 per share. This is an average of 78.3% higher than today’s price which is trading around $60.

What Analysts Say

Much of what analysts write about Penn National Gaming today relates to its 50% potential control stake (in less than three years) in Barstool Sports. That is the popular sports betting app that competes with DraftKings (NASDAQ:DKNG) and its app. I wrote a good deal about this in my previous articles.

For example, it appears that a number of new states, including potentially Maryland, South Dakota, and Louisiana could end up approving sports betting. That would increase Penn National’s potential reach to more Americans and hence enlarge its “handle” or sports betting book.

Some analysts are still positive on PENN stock, despite its recent rise. Macquarie analyst Chad Benyon recently raised his target price to $66, according to Barron’s, although he was concerned about the huge rise in the price. reports that the average target price of 13 analysts in the last 3 months is $76.77. This represents a potential gain of more than 26% for PENN stock. reports that the consensus target for 16 analysts is $66.29, or about 10% higher than today’s price.

Therefore, the average target of most analysts seems to be $71.53, about 19% above today’s price. This is not a de minimus increase, but rather a significant forecast rise.

What to Do With PENN Stock

At this point, given how far and fast PENN stock has risen, most investors are likely going to wait to see the company’s earnings on Oct. 29. The key issue to look at is the EBITDAR and FCF performance.

In addition, it will be important to see what the company’s outlook will be for Q4. Moreover, the election on Nov. 3 will help investors get a better perspective on prospects for sports betting market share in the U.S. over the next year.

Therefore, I suspect that most investors will wait to invest at a slightly lower price. However, keep in mind that the company is on track to produce significant free cash flow over the next year. This will ramp up as the novel coronavirus pandemic begins to peter out especially when a vaccine is effective throughout the population.

My estimate is that PENN stock is worth around $107, which it should hit sometime within the next year.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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