Penn National Casino Business Is Undervalued, Says Analyst

Posted on: January 19, 2022, 01:17h. 

Last updated on: January 19, 2022, 03:30h.

Off the coronavirus market bottom in March 2020, and deep into the first quarter of 2021, Penn National Gaming (NASDAQ:PENN) was one of the best-performing domestic equities of any stripe. Enthusiasm for online casinos and sports wagering was a big reason why the stock soared.

Penn stock
Hollywood Casino at Penn National Race Course. An analyst says Penn’s land-based casinos are undervalued. (Image: Baltimore Sun)

That luster is now gone, with Penn tumbling 69.31 percent from its 52-week high. But at least one analyst sees benefits in the online sports betting premium essentially being erased from the stock. In a report to clients, Stifel analyst Steven Wieczynski notes Penn’s brick-and-mortar casino operations, which investors glossed over while focusing on internet gaming, now appear undervalued.

The analyst and his team ran exercise modeling highly conservative assumptions around Penn’s land-based casino operations, while removing all value from iGaming and sports wagering from the equation. They discovered that the operator’s traditional gaming assets are attractively valued.

What we realized is, even after taking into account very conservative assumptions across their brick and mortar business and essentially removing all the value around their sports betting/iGaming businesses, we still see considerable value at current levels,” said Wieczynski.

The analyst rates Penn a “buy,” but trimmed his price target to $59 from $73. The new forecast implies almost 39 percent upside from the Jan. 18 close.

Penn Faces Headwinds, But Stock Is Inexpensive

Following a rough 2021 in which it badly trailed the S&P 500 and ranked as one of the worst-performing equities, Penn entered 2022 with some support in the investment community. But it’s also endured multiple price target reductions from analysts since the start of the year.

Much of the apprehension surrounding Penn stock stems from market participants adjusting expectations for sports wagering, and a growing disdain for operators that are losing money in the space. As the domestic sports wagering landscape evolves, it’s becoming clear operators face large capital expenditures to attract customers, and Wall Street is increasingly prioritizing profitability.

For its part, Penn isn’t spending heavily on marketing, opting to leverage the Barstool Sports brand to lure new sports bettors into the fold. Additionally, as the largest regional casino operator, Penn has avenues for generating cash and offsetting weakness in internet gaming.

“In our opinion, current trading levels ascribe zero value for PENN’s online sports betting/iGaming long-term opportunities,” adds Wieczynski. “We actually like this, given our negative view around the long-term prospects for OSB/iGaming, and we think investors are finally starting to understand the headwinds that are going to be in place for some time around these businesses. We continue to focus on PENN’s core brick and mortar business and believe investors should do the same.”

Too Interesting to Ignore

The Stifel analyst says Penn’s land-based casino business is worth $50 to $55 a share. At $52.50 — the midpoint of that range — that implies the stock is worth nearly 22 percent more than where it closed today.

Any upside derived from the company’s iGaming/sports betting operations would be icing on that cake, indicating that business is essentially a call option added to the broader Penn stock thesis.

“The risk/reward at current levels is too compelling to pass up, in our opinion,” observes Wieczynski. “While the near-term could be choppy until estimates get revised lower and settle closer to us, we expect as we move into the middle of the year and casino property visitation and spend levels remain elevated, investors will start to revisit the PENN story.”