Penn National Gaming (NASDAQ:PENN) has recently come well off of its highs. I wrote on March 22 that PENN stock was likely overvalued and investors should wait to buy it. This was when it was at $113.16 per share. As of June 1, PENN stock is at $81.35, or 28% below the price a little over 2 months ago.
The point is that the casino stock has retreated from its highs and hence its valuation has also deflated. This makes PENN stock an interesting play now, as it could be now at a reasonable valuation level.
For example, two months ago, PENN stock was trading at 49 times forecast earnings of $1.50 for 2022. Since then, however, analysts have raised their earnings estimates to $2.70, up 15.4% over the earnings per share (EPS) estimate of $2.34 for 2021.
This puts the stock on a forward 2022 price-to-EPS (P/E) multiple of just 30 times (i.e., $81.35 / $2.70). That is starting to look like a reasonable valuation, especially given the expected growth for the company.
And analysts really do like the future outlook for PENN National Gaming. Its Hollywood casinos around the country, along with its control of Barstool Sports, a mobile betting app, contribute to its earnings. By 2024, Seeking Alpha estimates that the average analyst EPS estimate is $4.20.
This puts PENN stock on a 3 year forward P/E of just 19 times. Here is what is likely to happen.
Sometime in the next two years, PENN stock will start trading based on estimates of its 2024 EPS. By that time, say about 2 years from now, the stock will be 30 to 35 times the $4.20 EPS estimate. Therefore, the stock is likely to rise to between $126 (i.e., 30 times $4.20 EPS) to $147 (i.e., 35 times $4.20 EPS).
So PENN stock is going to be worth $136.50 on average sometime within the next two years. That represents a potential gain of 67.8% over yesterday’s price of $81.35. It also implies a compound annual growth rate (CAGR) of 29.5% each year for the next 2 years.
That 29.5% average ROI for each of the next 2 years by investing in PENN stock is a very good ROI for most investors.
What To Do With PENN Stock
Analysts surveyed by TipRanks who’ve written on PENN stock in the last 3 months have an average 12-month target of $111.57, or 37% over yesterday’s price. This is close to my estimate of $136.50, although my projection target could take up to 2 years to be hit.
Part of the reason for this was the company’s excellent Q1 earnings results, released on May 6. This showed that its favorite measure of cash flow, adjusted EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) was up 7% year-over-year. The company also provided a good outlook for its upcoming quarterly revenue and cash flow in the conference call.
People are now returning to casinos to gamble. The Barstool Sports betting app joint venture is also bearing fruit. These trends will likely grow stronger over the upcoming quarters.
Moreover, PENN stock is now a good bargain compared to its peers. MGM Resorts International (NYSE:MGM) trades at a forward 2022 P/E ratio of 362 times. WYNN Resorts (NASDAQ:WYNN) trades at a 2022 forward P/E multiple of over 84 times earnings.
So, given its discount to its now higher earnings estimate and its discount to its peers, PENN stock is now at bargain-basement levels. At $136.50, PENN stock is worth 67% more than yesterday’s price, which represents a good ROI for most investors.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.