Penn National Analyst Says Share Price Indicates ‘De Minimis Value’ for Digital Gaming

The 61.35% loss incurred by Penn National Gaming (NASDAQ:PENN) stock over the past year places it at a price where the shares reflect “de minimis value” for online gaming operations, according to a sell-side analyst.

That’s the sentiment of Jefferies analyst David Katz, who, in a note to clients today, upgrades the regional casino operator to “buy” from “hold,” with a $49 price target. That implies upside of 58% from the May 17 close. Penn stock would need to more than quadruple to return to the all-time high around $142 set in March 2021.

At present levels, the shares are trading at 6.7X earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) and 9.6X free cash flow (FCF) on 2023 estimates, which suggests the market is either pricing in a recession or assigning no value to the company’s digital and media assets. In either case, we believe the shares should trade at higher levels,” writes Katz.

Down 40.37% year-to-date, Penn, like other gaming equities, is being taken to task in 2022, despite the operator’s bullish outlook. Additionally, some analysts view the casino company’s strong first-quarter results as impressive when considering that period is usually seasonally weaker than the June and September quarters.

Regional Steadiness in ‘Uncertain Times’

Casino stocks usually aren’t thought of as prime territory for investors looking for shelter from economic turbulence. But regional operators such as Penn may warrant a different view.

Jefferies’ Katz notes he’s a believer in “the relative benefit of regional gaming in uncertain times,” pointing out that Penn is battle-tested across a variety of economic climates.

Regional casinos are performing admirably in the wake of the coronavirus pandemic, providing vital contributions to the industry rebound. But there is a school of thought that these venues will eventually be vulnerable to high gas prices across the US, because the bulk of visitors to these properties are driving in for quick trips.

Penn Stock Inexpensive with Digital Allure

As Katz points out, Penn stock appears discounted relative to peers, and the current share price doesn’t adequately reflect potential growth from iGaming, Barstool Sportsbook, and theScore in Canada.

Using an enterprise value/EBITDAR ratio of 7x, Katz arrives at share price of $30 to $34 for Penn, based solely on the operator’s land-based casinos.

From there, $14 is added back in to reflect Barstool and theScore. That figure is based on 8% market share and 30% margins and $200 million in revenue from media. That results in $17 a share in value for Penn’s digital businesses. However, based on a current share price of just over $31, a case can be made Penn isn’t adequately pricing in potency from its brick-and-mortar casinos, let alone digital growth.