Penn National Gaming (NASDAQ:PENN) might be the winner for 2020’s most impressive holding. Penn stock was running toward $40 a share in February without a headwind in the way. Then, like seemingly every other name out there, it was blindsided by the novel coronavirus.
Penn had just inked a deal with Barstool Sports, taking a big stake in the company. The deal was set to boost Penn’s exposure at a time where online sports gambling is gaining momentum and Barstool has solid traffic growth.
However, it also left Penn in a more vulnerable state. Its balance sheet was susceptible to a liquidity crunch in an extreme event. Outside of a black swan situation, this wasn’t much of a concern — except that the coronavirus was a black swan.
Casino traffic plunged as stay-at-home orders were issued. Revenue for these companies evaporated, cash flow turned to cash outflow. Suddenly, Penn was faced with a potential liquidity issue. Or at least, that’s what Wall Street feared.
Penn stock plunged from $39.18 to $3.75 in 17 trading days as a result.
A Phoenix Rises From the Ashes
Penn was not about to accept that decimation, though. The company took steps to assure investors that, with some additional funding, it would be just fine.
The casino operator raised more funds, issuing $500 million in convertible bonds. It later raised almost $1 billion in funds in late September. We’ll see what the balance sheet looks like when Penn reports earnings. For now, it looks quite solid.
Coming into 2020, Penn had $437 million in cash and equivalents, along with $642.8 million in current assets. However, both figures were outweighed by current liabilities of $905.6 million.
This raises an eyebrow but again, under normal operating conditions, would have been fine. When Covid-19 struck, that created issues. Fast-forward two quarters later (the period ending June 30) and the balance sheet looks much better.
Cash and equivalents have risen to $1.24 billion, while current assets have climbed to $1.64 billion. Both figures now easily top current liabilities of $827 million, even though Penn saw its long-term debt go from $2.3 billion to $3.04 billion during this period.
The debt increase doesn’t matter. Well, actually it does matter, but not in a bad way. The balance sheet improvement removed short-term headwinds and the fear that Penn could be fold under a liquidity crisis.
Penn stock has reaped the rewards, too. Even with the current pullback, shares have risen 20-fold — no, that’s not a typo — to a high of $76.62. It’s not a question of whether to buy Penn now, it’s a matter of when.
No Liquidity Issues
In late September, Penn National Gaming took its fund-raising efforts to another level. The company brought in $982 million in a secondary offering. While many investors don’t like secondaries due to dilution, this decision was brilliant.
Regardless of the delusion that some investors have because they use the stock market as their barometer for the economy, the real economy still has plenty of issues. While airline traffic is recovering, it’s down significantly. Although the labor market is getting better, it’s still down notably vs. the last few years.
I’m not saying this is the end of the world. However, casinos, hospitality companies and many others are still hurting. While Penn stock has gone through the roof, its business is like the economy: recovering but not at full strength.
Breaking Down Penn Stock
From here, investors can completely ease their minds of the balance sheet. They can focus solely on the future, on the growth and on the opportunity ahead.
2020 is almost in the books. For Penn, it’s three-quarters of the way through the fiscal year. Analysts expect a doozy, with sales estimated to fall 31.5% and for earnings to plunge almost 400%.
The focus isn’t so much on 2020 anymore, it’s on 2021 and beyond. Investors know this is going to be a horrible year for Penn, its peers, and most companies in the market. The stock market is a forward-looking mechanism — it’s why stocks have rallied so hard over the last few months.
Investors believe the future is brighter. For Penn, analysts expect 35.5% revenue growth next year and a return back to profitability. In 2019, the company earned $1.84 per share. Next year, estimates call for earnings of $1.36 per share.
So it’s not a complete recovery in just one year. However, on a dip, Penn stock is worth considering as a long-term play on the recovery. Plus, it’s a good way to get exposure to online sports betting, an avenue that continues to open up.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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