Penn National Gaming Surges to the Top

Interest in Penn National Gaming (PENN) surged amongst financial pros this past week 873%.

This comes off the back of the company’s recent earnings release on February 3rd.

While earnings missed by more than 50%, revenue came in slightly ahead.

Yet, the stock barely budged, which is rather unusual.

Since 75% of S&P 500 companies typically beat on earnings and revenues, a miss of Penn’s magnitude stands out.

Normally, we’d expect shares to face heavy selling pressure.

Yet, they’ve actually climbed since earnings.

Which got us curious since shares are down more than 65% from their all-time highs in 2021.

As we explored Penn’s business, from its gaming properties to its partnership with Bartsool sports, we found something rather interesting.

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Penn’s Business

Penn National Gaming made headlines back in February 2020 when it entered into a strategic partnership with Barstool Sports.

Barstool agreed to exclusively prom

ote Penn’s land-based and online casinos and sports betting products including the Barstool Sportsbook mobile app.

Today, Penn owns 36% of Barstool through that strategic partnership. Within 3 years, the company plans to increase its stake from $161.2 million to 50% by purchasing another $62 million of Barstool’s stock.

The company’s core business owns and operates casinos and racetracks in 44 facilities across 20 states.

Revenues are divided into geographies and gaming vs food, beverage, hotel, and other.

The majority of the company’s revenues, nearly half, come from the northeast segment, with the south providing a bit more than 22%% of revenues.

Surprisingly, non-gaming revenue accounted for 19% of total sales in 2019 compared to 16% of total sales in 2021. While that speaks to the issues related to Covid, it’s not markedly different.

The ‘interactive’ segment includes Penn Interactive, which operates social gaming, iGaming, and the Barstool Sportsbook mobile app.

The ‘other’ segment includes standalone racing operations as well as a few other ventures including the Heartland Poker Tour.

We want to touch on the investment in Barstool Sports.

Traditional gaming such as slots only goes so far. Online gaming is a booming business with a younger demographic.

Furthermore, it starts Penn down a digital road that creates multiple complementary channels to engage and retain customers.

Lastly, we want to highlight the company’s recent acquisition of Score Media and Gaming Inc.

The $2 billion acquisition gives Penn a digital sports and media app with news and content to complement the current digital strategy.

Financials

Like most businesses, Penn took a hit in 2020 from Covid.

Since then, both revenues and margins have recovered nicely.

So why did the company miss EPS so badly in Q4?

It really came down to lower gross margins driven by gaming.

In Q4 of 2020, gaming expenses represented 42% of revenues. In Q4 of 2021, they represented 47% of revenues.

Similarly, Food and beverage jumped from 7.6% to 11.1%. However, admin expenses dropped from 29.4% to 21.2%.

However, on an adjusted basis, 2021 income is nicely above Q4 and the entire year of 2019 on a comparative basis.

Lastly, we want to note the company has $2.7 billion in cash on hand compared to long-term debt of $2.65 billion and leases of $8.67 billion.

But with nearly $300 million in cash from operations each quarter, we don’t see debt as a major burden.

Valuation

Evaluating Penn’s fundamentals was a bit challenging given their adjusted earnings calculations. However, as we looked at the valuation metrics at face value, they looked pretty decent.

Yes, price-to-earnings ratios aren’t great here, especially looking forward. However, 23x isn’t terrible either.

Nor are the price-to-sales ratios all that lucrative.

But the price to cash flows looks pretty decent.

Yet, the growth numbers are what really tells the story here.

With revenue growth of 65% year over year and forward growth of almost 23% on sales and EBITDA, we get a clearer picture of what’s going on here.

Penn is building out its business through technology and integrated operations. That takes some time. But once completed, it can pay huge dividends.

Our Opinion – 8/10

Financial pros got it right on this one. 

Penn has a solid business and plan to create additional income sources through sports betting and digital media.

We like how they have multiple channels that complement each other.

Ideally, we’d like to get shares below $40, but that’s more of a wish than a requirement.