Overall, Penn National (NASDAQ:PENN) stock remains an attractive way to invest in casinos and sports betting. It appears that the company’s online sports betting business is growing significantly, and the valuation of the stock remains reasonable.
Meanwhile, the company’s core casino business is also expanding meaningfully, and it should improve further as the pandemic continues to fade. Also importantly, Penn is taking actions that is helping its sports-betting business to become more popular.
Still, given the highly competitive nature of both regional brick-and-mortar casinos and online sports betting, it’s important for investors to monitor Penn’s performance closely each quarter. Additionally, I am much more bullish on another name in the sector – MGM (NYSE:MGM) – than on PENN stock at this point.
Strong Growth and a Reasonable Valuation
In September, Penn National reported that its second-quarter revenue rose versus Q2 of 2019, before the novel coronavirus began. Moreover, net income came in at $199 million, versus just $59 million during the same period two years earlier. Its core gaming sales, which represents its revenue from its brick-and-mortar casinos, was $1.305 billion, up from $1.08 billion during the previous quarter.
The company’s other revenue, which includes its online gambling unit, was $101 million, up meaningfully from $86.1 million during the previous quarter. And importantly for the owners of PENN stock, the company expects its Penn Interactive business, which is dominated by its online gambling business, to start significantly moving the needle of the company’s overall EBITDA starting in 2023.
The forward price-earnings ratio of Penn’s shares is just below 127. That’s a very reasonable valuation. Investors should, however, keep in mind that its balance sheet is less than optimal, as it had total debt of $11.15 billion and cash of $2.77 billion as of the end of Q2.
Effective Promotion of Online Sports Gambling
As of August, Penn had planned to expand its popular Barstool Sportsbook app, led by the increasingly famous Dave Portnoy, to an additional four to five states by the beginning of September. By the end of December, Penn had expected Barstool to be available in a total of 10 states.
Moreover, in August Penn acquired theScore, a Canadian company that Penn CEO Jay Snowden described as “the third most popular sports app and sports media name in North America.” According to Seeking Alpha columnist Logan Kane, theScore “offers scores and odds to consumers and lines and risk management to casinos and sportsbooks.”
The acquisition should enable Penn Interactive to acquire many more users in Canada, and Snowden indicated that the deal would also improve the quality of its app and sports-betting offerings, since theScore is quite advanced from a technological standpoint.
In the U.S. sports betting arena, the company is going up against three competitors that appear to be spending much more on paid ads for their offerings. Those three companies are MGM’s BetMGM, Flutter Entertainment’s (OTCMKTS:PDYPY) FanDuel, and DraftKings.
That discrepancy may be negatively impacting the popularity of Penn’s app, as its share of the downloads of sports betting apps fell to just 7% in September from 12% in August. Also negative for Penn is that, in its home market of Pennsylvania, its Barstool brand is third in cumulative total revenue, coming in well behind FanDuel (OTC:PDYPY) and DraftKings (NASDAQ:DKNG).
Additionally, Wells Fargo recently stated that it’s more upbeat on Las Vegas gaming operators than U.S. casino owners outside of that city. It also named DraftKings, Flutter, MGM, and Caesars (NASDAQ:CZR) as its top bets in online gambling, omitting Penn.
Wells stated that the “supply/demand dynamics” in Las Vegas are superior to those in other places in the U.S., as the competition among casinos outside of that city is much more intense than inside it.
MGM Remains My Top Pick
As I’ve stated previously, given the $1 billion that IAC (NASDAQ:IAC) invested in MGM, the latter company is very well positioned to effectively promote BetMGM. Indeed, BetMGM appears to be gaining ground, as its share of app downloads rose to 12% in September, up from 7% in August.
Also positive for MGM is the favorable trends in Las Vegas cited by Wells Fargo.
The Bottom Line on PENN Stock
Penn is already profitable, its bottom line looks poised to get an additional boost from its sports-betting business, and its valuation is attractive.
On the other hand, it’s facing tough competition in both of its main businesses.
I’m much more bullish on MGM stock than PENN stock, but investors who want some diversification in the casino space and a great deal of exposure to U.S. sports betting should, in my opinion, buy both names, while allocating significantly more funds to MGM.
And, as I mentioned earlier, those who buy PENN stock should keep a close eye on the company’s quarterly performance to ensure that it’s not beginning to lose a great deal of ground to its competitors.
On the date of publication, Larry Ramer held a long position in MGM.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 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.