Penn National Gaming (NASDAQ:PENN) stock is often seen as a play on the boom of internet casinos and online sports betting and while that’s accurate, it could be the company’s brick-and-mortar venues that help the shares regain lost momentum.
Since hitting an all-time high at $142 in March, Penn stock has been in a tailspin, slumping more than 39 percent. Analysts, however, remain enthusiastic on the name. Hedgeye’s Todd Jordan is part of that group, but he sees the operator’s regional casinos driving share price appreciation.
We’d like to focus investors back on PENN’s brick-and-mortar operations, which should provide significant earnings before interest, taxes, depreciation and amortization (EBITDA) upside versus Street Q1 and full year 2021 and 2022 estimates and drive the stock back up close to previous highs,” said Jordan in a Monday note to clients.
That’s welcome commentary for Penn investors as the stock is lower by almost 16 percent over the past month. The company, which operators roughly 40 casinos across 20 states, reports first-quarter earnings on Thursday.
“We see value back into the $120s as Q1 (and beyond) earnings redirect investors to focus on PENN’s sizable B&M operations and a better understanding of its long-term online sports betting/iGaming strategy,” adds Jordan.
Penn stock now resides on HedgeEye’s best ideas list.
Managing Online Expectations
At a time when investors and operators alike are scurrying to get slices of the internet casinos and sports betting pies, Penn management needs to better articulate “their more deliberate strategy,” according to Jordan.
Currently, sports wagering is live and legal in 21 states and Washington, DC. Penn’s Barstool Sportsbook app is live in just Illinois, Michigan and Pennsylvania with eyes on launching in Indiana and New Jersey this month and five more states by the end of this year. That current roster of five states is light compared to rivals. For example, DraftKings (NASDAQ:DKNG) offers mobile wagering in 11 states.
An advantage that Penn sports is that in the states where Barstool Sportsbook is running, it’s gaining solid market share with significantly less advertising and promotional spending than rivals.
“PENN still holds a competitive brand and database advantage that should high long-term market share and lower customer acquisition and market costs,” notes Jordan. “But management needs to adequately address concerns on their call and we think they will.”
Regional Boost for Penn Stock
As Boyd Gaming’s (NYSE:BYD) recent first-quarter earnings report indicates, stars are aligning for regional casino operators and some of those catalysts are likely to flow through to Penn National.
Citing consumers with government cash in their wallets, rising coronavirus vaccination levels and nice weather, Jordan says March could be “the start of a major inflection point” for regional casino operators.
The analyst said Boyd was able to convince investors that March momentum carried over into April and that Penn will probably deliver similar commentary.
“PENN is a leader in most of its markets so we don’t expect them to miss out on what should be a strong spring and summer season for casinos,” said Jordan.
That’s vital because the operator generates more than 80 percent of its revenue from brick-and-mortar casinos. Hedgeye forecasts upside of 30 percent-plus for Penn stock.
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