Penn National Analysts Rush to Defend Stock as Slump Intensifies

Posted on: May 7, 2021, 07:02h. 

Last updated on: July 7, 2021, 02:25h.

On Thursday, Penn National Gaming (NASDAQ:PENN) reported better-than-expected first-quarter results, but the stock tumbled more than eight percent.

Penn stock
Hollywood Casino at Penn National Race Course in Grantville, Pa. Analysts are defending Penn National Gaming amid weakness in the stock. (Image:

That extends a now-lengthy slide that’s seen the regional casino operator shed 18 percent over the past month and 41 percent from its March highs. Today, analysts are lining up to defend Penn stock, with some saying the sell-off is too much, too rapidly, and that it could prove to be a buying opportunity.

Morgan Stanley’s Thomas Allen said the Penn slide is “overdone” following what he calls a “strong” first-quarter showing. He reiterates an “equal weight” rating on the shares with a $99 price target, implying upside of almost 18 percent from the May 6 close.

In the first three months of the year, the gaming company earned 55 cents a share on revenue of $1.27 billion. Analysts expected earnings per share of 28 cents on sales of $1.14 billion. Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) for the January through March period was $447 million, easily topping the consensus estimate of $393.9 million.

Encouraging Land-Based Trends for Penn Stock

During its rally and subsequent ascent into the S&P 500, Penn was revered for its nascent iGaming and sports betting operations. But it’s still the largest regional casino operator in the country.

Trends on that front are encouraging. But yesterday’s sell-off in the stock may have been a case of investors pricing in the effects of COVID-19 closures that hampered the company’s first-quarter performance in Illinois and Pennsylvania, where gaming venues were closed for part of January. Additionally, Penn’s Zia Park in New Mexico didn’t reopen until early March. Still, analysts like what they see.

Pent-up demand from their brick and mortar customers is impressive, and has yet to fully roll out across PENN’s entire portfolio,” said Stifel’s Steven Wieczynski in a note to clients. “

“Results in the less-restricted South segment outpaced the broader PENN portfolio and bodes well for states still yet to pare back restrictions on casinos to the same degree,” Wiezynski continued. 

Wieczynski still rates Penn a “buy,” but trimmed his price forecast to $108 from $124, to reflect a more conservative posture on the company’s internet casinos exposure and Barstool Sportsbook. The operator is aiming to have the mobile betting app live in eight states by the start of NFL season, and 10 states by the end of 2021.

Penn Keeping Costs in Check

As is the case with many regional gaming operators, Penn is proving adept at boosting margins against the COVID-19 backdrop. The company estimates long-term margin expansion will approach 90 percent of 2019 revenue.

Cost management is another point in favor of Penn stock, notes Wieczynski.

PENN’s customer acquisition costs are well-below market rates, while advantages on customer retention are likely underappreciated at this stage of the game,” said the Stifel analyst. “PENN noted their blended CPA is running below $100/customer, which compares to peers running $300 to $800 at this time.”

While investors may be fretting about the sustainability of Penn’s stellar margin trends, the analyst says he’s confident that Penn management can run the business in a leaner fashion even as demand trends return to pre-pandemic form.