When the novel coronavirus driven panic was at its peak, Penn National Gaming (NASDAQ:PENN) plunged to lows of $3.75. Expansionary monetary policy coupled with a stimulus package calmed the markets and valuations returned to relatively sane levels. PENN stock currently trades at $14.10 with the stock surging by 211% from the recent lows.
Even after the big recovery, I remain positive on the stock for further upside.
First, let’s revisit the stock price action so far this year. PENN stock traded at $25.56 at the end of the last year. By February 2020, the stock surged by 53% to highs of $39.18. The coronavirus triggered plummet followed.
However, it’s important to understand the reason for the stock rally before the crisis. In January 2020, Penn National Gaming announced the acquisition of 36% interest in Barstool Sports for a consideration of $163 million. Barstool Sports is a digital sports media company.
The acquisition was in line with the company’s strategy of being an “omni-channel provider of retail and online gaming and sports betting entertainment.”
I believe that this strategy is likely to be game changing for Penn in the coming years. To put things into perspective, Penn believes that online casinos, retail sports and online sports are likely to have a total addressable market of $7.5 billion to $10.4 billion by 2025.
Further, according to Grand View Research, the global online gambling market is likely to be worth $103 billion by 2025. Clearly, there is a big market opportunity and Penn is well positioned to benefit.
Navigating the Current Crisis
Growth in online gaming, gambling and sports can help Penn expand beyond the United States. PENN stock therefore has a bullish trigger beyond the crisis.
However, for now, it’s equally important to discuss the company’s capability to navigate the headwinds. The good news here is that the Centers for Disease Control and Prevention Director Robert Redfield believes that the U.S. is coming to the coronavirus peak. Southern states in the U.S. are already moving to reopen their economy. It’s likely that Penn will reopen some casinos relatively soon.
According to Union Gaming analyst John DeCree, “even some revenue would help mitigate cash burn such as interest and rent expense to some degree. This would help extend the liquidity runway, alleviate balance sheet pressure, and preserve equity value.”
Recently, the company entered into an agreement with Gaming & Leisure Properties (NASDAQ:GLPI) for the sale of the Tropicana Las Vegas real estate assets. This will give Penn $337.5 million in rent credit and ease the lease payment scenario to some extent. The company’s decision to furlough 26,000 team members will also help in conserving cash.
On the flip side, the CDC believes that a second wave of coronavirus can hit the U.S. in the winter. Therefore, challenges can sustain through the year and potentially into 2021.
Coming back to the liquidity scenario, Penn has total contractual cash obligations of $1.1 billion for the year. As of December 2019, the company had $455 million in cash and equivalents. In addition, the company had $530 million available under the revolving credit facility. Factoring the recent agreement with Gaming & Leisure Properties, the company has ample liquidity to navigate through the year.
The Bottom Line on PENN
I believe that PENN stock is trading at attractive levels even after the recent upside. Once the company navigates the current crisis, there is likely to be stable cash flows from the casinos and growth from the digital segment.
Investors point to the fact that the company has $10.1 billion in operating lease obligation and $11.1 billion in financial obligations. However, $8.2 billion in operating lease and $9.3 billion in financial obligations are due after 2025. With an extended duration of remaining lease term, there are no major concerns in the foreseeable future.
Once different states in the U.S. move to reopen the economy, I believe that PENN stock will trend higher from current levels. Beyond this near-term trigger, growth as an omnichannel provider of gaming and betting will take the stock higher.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
