[Editor’s Note: “Even as Penn National Gaming Stock Rebounds, Consider Other Casino Plays” was originally published April 17, 2020. It is regularly updated to include the most relevant information.]
What’s next for Penn National Gaming (NASDAQ:PENN) stock? Shares have skyrocketed in recent weeks. With casinos reopening after the novel coronavirus shutdowns, investors are betting on a quick rebound. But, who’s to say we’ll see a V-shaped recovery at the gaming tables?
Casino stocks offer high risk, but high potential returns. Yet, Penn National now trades where it was pre-outbreak. Even as there are reasons why shares aren’t such a solid bet.
Firstly, the company mostly leases the real estate under its casinos. This may have been a smart financial engineering move. But it leaves them fewer liquidity options relative to peers.
Secondly, shares trade at a premium to stronger rivals like Las Vegas Sands (NYSE:LVS) and MGM Resorts (NYSE:MGM). This could make them better plays as casino stocks recover, as might VanEck Vectors Gaming ETF (NASDAQ:BJK), which holds all four names in its 42-stock exchange-traded fund portfolio.
Also, it’s questionable whether casino revenues will bounce back to normal right away. Given the industry’s high fixed costs, even a 20% decline in revenue could mean bad news.
In short, it may be better to skip out on this “too hot to touch” regional casino play. Let’s dive in, and see why PENN stock isn’t your “best bet.”
Penn National Post-Pandemic
Can Penn National survive the coronavirus? When the pandemic first hit America, Wall Street’s answer was a resounding “no” as shares fell from above $39 in February to as low as $3.75 in March. Yet, with its casinos reopening, shares have rebounded ten-fold, to prices just above $37.50 per share.
Will shares continue to climb? That’s debatable. On one hand, initial results indicate strong demand. On the other hand, most states are imposing strict social distancing guidelines. This could mean things won’t return to 100% for quite some time.
But, there’s another big risk specific to PENN stock. The company leases, not owns, most of its properties. In fact, the company was a pioneer in the casino REIT (real estate investment trust) trend.
In 2013, the company spun off most of its real estate as the first casino REIT, Gaming and Leisure Properties (NASDAQ:GLPI). This transaction allowed them to realize the underlying value of its property. But while this boosted valuation, it left them exposed to heavy lease liabilities.
As our own Matt McCall wrote back in April, Penn National carries $8.5 billion in lease liabilities on its balance sheet. In 2020 alone, the company must make $900 million in lease payments. This wouldn’t be a problem if their casinos were generating cash flow. But, what happens if casinos fail to see a V-shaped recovery? It’s easy to see how this company could fall short of Wall Street’s sky-high expectations.
Yet, enthusiasm over the company’s moves into sports wagering have sent shares to a highly frothy valuation. With this in mind, things don’t look so hot from a risk/return perspective.
Sports Betting Catalyst More Than Priced Into Shares
The recent rally in PENN Stock has made shares richly priced. The company’s enterprise value/EBITDA (EV/EBITDA) ratio now stands at 15.9. That’s a premium to the EBITDA multiples of Las Vegas Sands (12.6) and MGM (14.3).
Why have shares reached such a premium valuation? Chalk it up to the company’s sports betting catalyst. As I wrote May 29, the company’s investment in Barstool Sports could help boost the prospects for their budding sportsbook operations.
By partnering with Barstool, the company can market directly to podcasting network’s sports-obsessed, millennial-aged fan base. In short, a viable means to grab market share from first movers DraftKings (NASDAQ:DKNG) and Fanduel (OTCMKTS:PDYPY).
I agree this makes for a valid bull case for Penn National stock. Yet, this catalyst is more than priced into shares. Despite the pandemic closing its facilities for two months, this casino stock today has just about retraced its 52-week high.
In other words, the easy money’s already been made with PENN stock. Buying today out of pure FOMO may not be the best move. If tangible results in the next quarter or two don’t match up with today’s expectations, shares could fall back to lower levels.
PENN Stock Is Not Your ‘Best Bet’
Casino reopenings, along with excitement over the company’s sports betting catalyst, have led investors to bid up this gaming company’s shares as of late. Should you join in, as the stock hits past highs?
Not so fast! PENN stock has more than priced-in its multiple catalysts. If you want to wager on a rebound, consider other casino stocks out there. But skip this one for now.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.