Penn National’s Enticing Valuation and Positive Catalysts Make It a Buy

Penn National (NASDAQ:PENN) has generated profits in each of the last two quarters — and the company’s first-quarter results were particularly impressive. But that’s not the only reason to like PENN stock.

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

On top of its quarterly performance, Penn National also looks critically well-positioned to benefit from a meaningful expansion of its sports gambling business. Meanwhile, the recent large decline of PENN stock has made the valuation of its shares quite reasonable.

Given these points, I recommend that investors buy this name. Here’s why.

PENN Stock: Penn National Has Entered the Black

As I said, Penn National’s Q1 was particularly impressive. For example, Q1 earnings per share (EPS) came in at 55 cents, beating the analyst estimate by 27 cents. The company’s EBITDAR (excluding certain items) was also $447 million.

Moreover, this casino operator’s Q1 top line climbed 13.4% year-over-year (YOY) to $1.27 billion and was little changed versus the same period in 2019. For Q2, however, Penn provided top-line guidance of $1.45 billion to $ 1.55 billion, versus the mean estimate at the time of $1.36 billion and its sales of $1.32 billion in Q2 of 2019.

Needless to say, the fact that the company’s Q2 revenue is expected to be higher than the same period in 2019 suggests that it is benefiting significantly from its online sports betting business as well as from pent-up demand in the reopening. Penn provided adjusted Q2 EBITDAR guidance of $540 million to $580 million as well, versus $406.5 million during the same period in 2019.

Finally, pointing out that the company delivered free cash flow (FCF) of nearly $155 million in Q2, InvestorPlace contributor Mark Hake estimates that the company’s annual FCF might reach $725 million next year. As a result, Hake believes that the PENN stock market capitalization may reach $18 billion. That is a significant hike from the current market cap of $10.69 billion.

Penn National’s Sports Betting Revenue Should Surge

So, Penn National has performed quite well in recent quarters. But the momentum is not stopping for PENN stock. Propelled by multiple, strong positive catalysts, this company’s revenue from online sports betting should jump in the rest of this year — and in 2022.

First, PENN should continue to enter new states as they legalize sports betting. In Q1, Penn entered Michigan and Illinois. In Q2, it also started offering online sports betting in Indiana.

What’s more, amid new indications that millennials are becoming more interested in sports betting and casino wagering, Penn’s Barstool subsidiary should attract hundreds of thousands of young consumers to its offerings. Additionally, among older folks, the company can still use its brick-and-mortar casinos to effectively advertise its online gambling products.

As a result of Penn’s effective existing venues and its profitable brick-and-mortar business, the company — unlike Draftkings (NASDAQ:DKNG) — is not spending the lion’s share of its revenue on sales and marketing.

A Reasonable Valuation

Lastly, though, PENN stock is attractive for its reasonable valuation.

After losing over 25% in the last three months, PENN stock has a forward price-earnings (P/E) ratio — based on analysts’ average 2021 EPS estimate — of just 23.24. That’s a very reasonable valuation. Moreover, Penn’s shares are changing hands for less than two times analysts’ mean 2022 sales estimate. That makes the shares quite a bargain, given Penn National’s strong growth catalysts.

Contrast Penn’s valuation with that of DKNG stock, which is trading at 11.96 times analysts’ 2022 sales estimate.

The Bottom Line on PENN Stock

So, Penn National has become profitable again and its online sports gambling revenue should pop going forward. This will be driven by the legalization trend, millennials’ increased interest and the company’s powerful in-house marketing vehicles. Finally, after its recent decline, Penn is also trading at a very reasonable valuation in contrast to Draftkings.

PENN stock should definitely be bought on weakness by medium-term and long-term investors. The shares are far more attractive than DKNG at this time.

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

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 


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