Penn National Gaming Has a Business Model with a Competitive Advantage
There are often frequent comparisons between Penn National Gaming (NASDAQ:PENN) and Draftkings (NASDAQ:DKNG). However, the companies couldn’t be more different. Penn National owns or has interests in some 40 gaming properties across 19 states, under well-recognized brands such Hollywood Casino and Boomtown. Draftkings, on the other hand, has an app — and it’s a money-losing app, to be sure. So, PENN stock may have some advantages over its more famous, publicly traded rival.
For example, Penn National has an app as well. And it’s one of the most recognizable brands in digital fantasy games and sports-betting, too: Barstool Sports. PENN acquired a 36% interest in Barstool in February 2020 for $163 million, giving them a much needed leap forward into the online sports-betting world. After launching its app in Pennsylvania in September, Barstool was be able to garner a 13.4% market share of total online handle in the state.
Now, the company expects similar traction with Michigan after the app launched there in January 2021. Likewise, Illinois represents another big opportunity for Penn National — the state just approved their application for online sports-betting this month.
So, with all that said, should you invest in PENN stock?
PENN Stock versus Draftkings
The difference between PENN and Draftkings is profitability and the ability to invest in the future without accessing the capital markets.
Penn National — with its established base of profitable physical casinos — may generate over $1.2 billion in EBITDA this fiscal year. On the other hand, Draftkings is expected to generate an EBITDA loss of over $700 million. The company also just announced their intention to issue $1.1 billion in convertibles senior notes in order to cover those losses.
That may be an apples and oranges comparison — putting a large number of established casinos up against a startup app. However, PENN has stated that their interactive or digital business (Penn Interactive, Barstool Sports and more) will likely break even in 2021 and be profitable on a standalone basis in 2022. That’s much sooner than Draftkings.
Finally, Penn’s omnichannel approach and cross-marketing efforts appear to already be paying off. For instance, an in-person sportsbook rebranded under Barstool Sports at one Chicago casino has shown fantastic results (Page 11). Additionally, company studies show that customers who play across both platforms — in a casino and online — are far more valuable than those that choose just one.
PENN Doesn’t Offer a Great Entry Point
Despite all of the great things going for PENN, though — along with its stellar management team driving both innovation and growth — it’s still not attractive right now. Why? The day-trading and Reddit-fueled advance in the stock. Hyper-parabolic stock charts rarely make good long-term investments.
Currently trading at 16.42 times EBITDA and a forward price-earnings ratio of 76.28, the growth Penn has in store is already baked in. Instead, an entry point under $80 would provide a better margin of safety compared to today’s price. Don’t forget that PENN was trading below $80 just three months ago — not to mention $9 a year ago.
Of course, one can project the double-digit revenue growth, increasing operating margins and fantastic profit contributions Penn National will glean from Barstool Sports. However, it’s almost impossible to get a discounted cash flow valuation even remotely close to today’s price. Hopefully, though, the trading madness surrounding stocks like PENN and DKNG will subside once the real March Madness is over.
So, for now? Just keep an eye on PENN stock and wait for a better entry point.
On the date of publication, Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA is an experienced investment manager and business writer who has worked in the investment and securities business since 1994. He received a B.B.A. in Finance from Texas Tech University.
