Penn National Is Sizzling, But Analyst Sees Unfavorable Near-Term Risk/Reward

On the back of a decent second-quarter earnings report delivered last week, and favorable comments from management on July and August booking trends, Penn National Gaming (NASDAQ: PENN) notched a jaw-dropping weekly gain of almost 45 percent.

As impressive as that it is, a run like that in a short time frame can give some analysts pause. For example, Wolfe Research analyst Jared Shojaian now sees a lack of excitement in the risk/reward profile on Penn stock.

We raise estimates, as regional trends have been better than expected throughout this earnings season,” said the analyst. “Still, even if we give ~$23 a share for the Barstool opportunity, then the remaining Op-Co is still trading at ~7.3x our 2021 enterprise value/earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR), which isn’t exciting to us in this still highly uncertain (sector), while Penn no longer owns any assets.”

In non-analyst speak, Penn’s 36 percent stake in Barstool Sports remains compelling, particularly with the domestic sports calendar getting back to normal. But the company doesn’t have much left in the way of real estate to sell to raise capital if needed.

Investors Cheer Barstool

Penn reported its June quarter numbers on Aug. 6, and over the last two days of the week, the stock soared almost 24 percent, punctuated by an 11.72 percent jump last Friday on above-average volume.

“The launch of the app is on track for initial roll out in September, and is expected to be fully rolled out to all states by 1Q21,” said Shojaian. “It’s seemingly becoming the common trend that when PENN management speaks, especially on sports/iGaming, the stock goes up.”

However, there are vulnerabilities for Penn and other equities levered to the sports trade. The 2020 college football season increasingly appears to be on the brink because of COVID-19. Last week, the University of Connecticut canceled its season, becoming the first FBS program to do so.

On Saturday, the Mid-American Conference (MAC) — a favorite of bettors because of the league’s mid-week games and often high-scoring affairs — followed suit.

Regional Strength

Penn echoed sentiments from many of its rivals that already stepped into the earnings confessional, highlighting strength in its regional gaming portfolio during the June quarter.

Shojaian notes the operator’s venues that reopened in May, including Southern properties, are performing the best, and that the company can get reach 2019 EBITDAR levels on 90 percent of that year’s revenue, an improvement over a prior forecast of 95 percent.

The analyst has a “peer perform” rating on the stock, which is up more than 1,200 percent from its March lows.