Penn National Gaming (NASDAQ:PENN) is a strong casino brand that is likely to spike significantly higher over the next year. This is due to its strong free cash flow (FCF) generation, especially as its new sports betting app, Barstool Sportsbook, rolls out throughout the country. My estimate is that PENN stock is worth at least 52.5% higher at $114 per share.
Penn National Gaming runs 41 gaming and racing properties spread over 19 states across the U.S., mostly under the Hollywood Casino brand name. It also has a 36% interest in Barstool Sports and uses that brand in its mobile gaming app. It splits revenue with the app that is driven to its sportsbook properties.
Stellar Q1 Numbers
On May 6, the company revealed stellar Q1 results, with massive cash flow gains. It also included significant contributions from the Barstool app. Although revenue declined slightly by 6%, its EBITDA (earnings before interest, taxes, depreciation and amortization) results were significantly higher.
There are two side notes about this data. First, due to the Covid-19 pandemic, the company included information from both Q1 2020 and Q1 2019; its properties were closed for much of Q1 2020, so the company discusses many of it numbers as compared to the Q1 2019 numbers, which I use here as well.
Second, although the company likes to exclude rent in its calculations — emphasizing EBITDAR, where the R stands for rent — I keep this expense since it is constant and required. The EBITDA results are a form of cash flow and allow investors to see how well it can handle its debts. I focus on FCF since that is what investors in equity are left with, and because it can be used to pay dividends to equity owners.
EBITDA was up $29.9 million to $336.6 million in Q1 or +9.75% compared to Q1 2019. Moreover, its EBITDA margin rose to 26.4% from 23.9%. A good portion of this increase probably came from its digital apps.
For example, Penn National Gaming said that in the past 7 months it has generated over $660 million and $61 million in handle and gaming revenue. The point is that this revenue is mostly cost free (i.e., has no rent or overhead expense, other than the split with Barstool Sports itself).
But more important than all this, the company became FCF positive this quarter. Last year Penn National lost $9.6 million in FCF. This can be seen on page 4 of its 10-Q filing. Last year it generated negative $33.2 million in cash flow from operations (CFFO) and spent $42.8 on capex, and $42.8 million – $33.2 million leaves $9.6 million. However, in Q1 2021 its had $180.5 million in CFFO and spent just $25.7 million on capital expenditure. This means its FCF was $154.8 million and its FCF margin was 12.1% ($154.8 million / $1,274.9 million).
We can use this figure to value PENN stock.
What PENN Stock Is Worth
Analysts surveyed by Seeking Alpha now estimate that revenue for 2021 will be $5.63 billion and it will rise 5.68% by 2022 to $5.95 billion. Using these numbers we can estimate its future FCF profitability.
For example, if we apply the 12.1% FCF margin to the $5.95 billion 2022 sales forecast, the FCF estimate is $720 million. Moreover, with profit contributions and the rollout of Barstool Sports, the FCF margin should rise to 15% by 2022. That would bring 2022 FCF up to $892.5 million. This figure can be a tool to measure the value of PENN stock.
By using an FCF yield metric of 5% we can derive the value of PENN at $17.85 billion (divide $892.5 million in FCF for 2022 by 5%). Our estimate of $17.85 billion is 53.3% higher than the present $11.641 billion market value as of the start of July 7.
In other words, since PENN stock opened at $74.45 today (July 7), it has a target value of $114.13 within one year from now (i.e., up 53.3%).
Analysts tend to agree with me. For example, TipRanks reports that 10 analysts have an average price target of $106.44, up 43% from today. Also, Yahoo! Finance reports that 13 analysts have an average target price of $107.67. Seeking Alpha has a similar target at $107.31. These are very close to my $114 price target.
Look for good things to happen with PENN stock over the next year as the company’s FCF gushes huge profits for the company.
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.comPublishing Guidelines.