Penn National Gaming (PENN) is among the top-rated gambling stocks as more states allow sports betting and online wagering. Is Penn stock a buy right now? Here is what the fundamentals and technical analysis say.
Penn is the nation’s largest and most diversified regional gaming company. It has 41 properties across 19 states.
The company’s properties feature about 50,000 gaming machines, 1,300 table games and 8,800 hotel rooms. Penn operates under brands that include Hollywood, Ameristar and L’Auberge.
But the pandemic is testing its ability to shift its business model to offset drastically lower casino foot traffic. Penn Interactive operates retail sports betting across the company’s portfolio, as well as online social casino, bingo and iCasino products.
To bolster its sports betting portfolio, Penn in February 2020 announced it had partnered with Barstool Sports in Pennsylvania. Barstool will exclusively promote the company’s land-based and online casinos and sports betting products, including Barstool Sportsbook mobile app, to its national audience.
Gambling laws passed in several states this election cycle, notably one that allows online sports betting in Maryland. Penn announced on Dec. 15 it entered an agreement with Gaming and Leisure Properties (GLPI) to purchase the operations of Hollywood Casino Perryville in Maryland for $31.1 million in cash. Penn is also leasing the real estate associated with the property for $7.7 million annually.
Penn CEO said the acquisition “provides another opportunity to expand our unique omni-channel platform with a Barstool-branded retail sportsbook and mobile app.”
The expansion of legal gambling could also be a boon rivals DraftKings (DKNG), Flutter Entertainment‘s (PDYPY) FanDuel, Red Rock Resorts (RRR), Caesars Entertainment (CZR) and Churchill Downs (CHDN).
Most recently, New York lawmakers appear poised to allow online sports gambling. New York is one of the Big Four states that would really move the needle for gambling stocks like Penn. The other three are Michigan, which already allows online sports wagering, Florida and California.
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Penn Stock Technical Analysis
Shares rallied past a second-stage consolidation buy point of 76.72 in heavy volume to an intraday high of 84.89 on Dec. 14, MarketSmith chart analysis shows. The stock continued to advance, hitting a record 99.24 on Dec. 23. Shares are now well extended.
The relative strength line rose sharply from June to October 2020, but then declined later in October. In recent weeks, it’s climbed back up near levels achieved early in the consolidation. Penn stock has a Relative Strength Rating of 98 out of a possible 99.
With a Composite Rating of 82 out of 99, Penn is ranked No. 3 in the leisure gaming/equipment industry group. The rating combines key fundamental and technical metrics in a single, easy-to-use score.
Penn stock is a component of the Roundhill Sports Betting & Gaming ETF (BETZ), which holds dozens of gambling stocks. BETZ’s top holdings include Penn, as well as rivals Flutter Entertainment (which owns FanDuel), DraftKings and William Hill PLC. BETZ has an RS Rating of 83.
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Penn Earnings And Fundamental Analysis
The IBD Stock Checkup assigns Penn stock an EPS Rating of 38 and an SMR Rating of E, the worst possible rating, as the coronavirus decimated casino stocks with lockdown orders. The EPS rating reflects a company’s health on fundamental earnings metrics, and its SMR Rating gauges sales growth, profit margins and return on equity.
Penn had been struggling before the pandemic hit, with several quarters of losses or flat earnings. Then the bottom fell out in the first quarter, when it reported a $5.26-a-share loss. The following quarter was an improvement, but Penn still posted a loss of $1.69 a share.
Penn finally returned to profitability in the third quarter, posting EPS of 93 cents, a 145% surge from the year-ago period, and crushing views for 48 cents. It had net revenue of $1.13 billion, above views for $1.1 billion, but 17% below the year-ago period.
Many of the gains come from painful cost-cutting measures, including massive layoffs over the past several months, according to Casino.org.
CEO Jay Snowden says the company continues to manage ongoing Covid-19 restrictions. “As we look ahead, we continue to see solid results across the portfolio in October, which is being driven not only by our margin improvement, but also our sustained revenue performance,” he said in a statement. “In sum, we believe we can close out the year with positive momentum.”
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Online Gambling Lifts Penn Stock
Penn’s partnership with Barstool Sportsbook is already proving to be a success. It had nearly 48,000 registrations with a handle of $78 million across 30,000 first-time depositors.
Nearly all, 95%, of the registrations were new to the Penn ecosystem and not from its myChoice loyalty members, noted Wolfe Research analyst Jared Shojaian in a recent report. However, loyalty members represented 20% of the total wagers, he added.
“Penn pointed out that these results were generated with little external marketing, which the company believes highlights Barstool’s ability to convert its followers into its sports betting product,” he added.
Penn’s focus on online sports wagering is no surprise as more states look to gambling tax revenue to shore up budgets decimated by the pandemic.
After the Supreme Court ruled in 2018 to overturn a federal ban on sports betting, 25 states have passed laws allowing it. Voters approved sports gambling in Maryland, Louisiana and Colorado on Nov. 4.
Meanwhile, the online gambling market is slated to reach $127.3 billion by 2027, according to Grand View Research.
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Younger Consumers, Cashless Transactions
In a recent investor presentation, Penn noted that 77% of handle from its Hollywood Gulf Coast property was from bettors under the age of 50 and 59% of handle from bettors under the age of 40, Shojaian said in a note. Penn also said that 80% of people who accessed the Barstool Sportsbook app were between the ages of 21 and 34 years old, which Penn finds encouraging.
And like nearly everyone else trying to make transactions safer during Covid, Penn plans to roll out touchless technology sometime in 2021.
“On the land-based side of our business, we believe there is real momentum in moving toward cashless technology that should not only improve efficiency and customer service, but also result in incremental revenue as we appeal to a younger demographic that expects a cashless transaction experience in their daily life,” CEO Snowden said.
Is Penn Stock A Buy Now?
While the market for online gambling is growing and can be a promising revenue stream for Penn, analysts caution there could be bumps in the road. Three of the so-called Big Four states still do not allow sports betting. Michigan recently passed a law allowing sports wagering, but California, New York and Florida have not.
Ross Gerber, CEO of Santa Monica, Calif.-based investment management firm Gerber Kawasaki, said sports betting is a lightning rod issue among socially conservative constituents.
“It’s not a pure profit for the state,” he told IBD. “Gambling creates social woes like drug abuse, addiction, divorce, that ultimately the states pay for.”
Penn stock has soared to record highs, but is well extended from the 76.72 buy point.
Bottom line: Penn stock is not a buy. But as a leader in the booming sports betting market, investors should keep an eye on this stock for future buying opportunities. Also note that while the company is making a profit again, strong sustained growth hasn’t returned yet.
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Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.