[Editor’s Note: “Even as Penn National Gaming Stock Rebounds, Consider Other Casino Plays” was originally published April 17, 2020. It is regularly updated to include the most relevant information.]
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What’s next for Penn National Gaming (NASDAQ:PENN) stock? Shares have skyrocketed in recent weeks. With many states allowing casinos to reopen after the novel coronavirus shutdowns, investors are betting on a quick rebound. But, who’s to say we’ll see a V-shaped recovery at the gaming tables?
Casino stocks offer high risk, but high potential returns. Yet, Penn National may not be your best option. Firstly, the company mostly leases the real estate under its casinos. This may have been a smart financial engineering move. But it leaves them fewer liquidity options relative to peers.
Secondly, shares trade at a premium to stronger rivals like Las Vegas Sands (NYSE:LVS) and MGM Resorts (NYSE:MGM). This could make them better ways to play a potential industry rebound, as might VanEck Vectors Gaming ETF (NASDAQ:BJK), which holds all four names in its 42-stock exchange-traded fund portfolio.
Also, it’s questionable whether casino revenues will bounce back to normal right away. Given the industry’s high fixed costs, even a 20% decline in revenue could mean bad news. Especially for weaker names like Penn National.
In short, it may be better to skip out on this “too hot to touch” regional casino play. Let’s dive in, and see why PENN stock isn’t your “best bet.”
Penn National Post-Pandemic
Can Penn National survive the coronavirus? When the pandemic first hit America, Wall Street’s answer was a resounding “no” as shares fell from above $39 in February to as low as $3.75 in March. Yet, with casinos reopening from coast to coast, shares have rebounded more than eight-fold, to around $31.60 per share.
Will shares continue to climb? It’s possible. As this Seeking Alpha contributor recently wrote, half of the company’s casinos reopen by May 31. This includes properties in Louisiana, Missouri, and Mississippi. Also, casinos on the Las Vegas strip can reopen starting on June 4. That means a reopening of the company’s Vegas properties (Tropicana, M Resort) could be around the corner.
Yet, these states are imposing strict social distancing guidelines. This could mean things won’t return to 100% for quite some time.
But, there’s another big risk specific to PENN stock. The company leases, not owns, most of its properties. In fact, the company was a pioneer in the casino REIT (real estate investment trust) trend.
In 2013, the company spun off most of its real estate as the first casino REIT, Gaming and Leisure Properties (NASDAQ:GLPI). This transaction allowed them to realize the underlying value of its property. But while this boosted valuation, it left them exposed to heavy lease liabilities.
As our own Matt McCall wrote April 3, Penn National carries $8.5 billion in lease liabilities on its balance sheet. In 2020 alone, the company must make $900 million in lease payments. This wouldn’t be a problem if their casinos were generating cash flow. But how about now, after its properties sat idle for several months?
Yet, the stock’s current valuation doesn’t reflect this weakness. In fact, shares now trade at a premium to peers.
Richly Priced Relative to Risk
The recent rally in PENN Stock has made shares richly priced. The company’s enterprise value/EBITDA (EV/EBITDA) ratio now stands at 15.1. That’s a premium to the EBITDA multiples of Las Vegas Sands (11.9) and MGM (13.2).
Sure, there may be good reason for this valuation discrepancy. Penn is a more of a regional play compared to these Vegas-centric rivals. Players may prefer to gamble closer to home, even as travel reopens post-pandemic. However, Penn National was on shakier ground financially coming into the pandemic.
Granted, Penn’s liquidity situation has improved in recent weeks. After a $675m equity and convertible debt offering, the company has plenty of capital to ride out the storm.
Also, many of their liabilities are leases with GLPI, which could provide the company some rent relief. The spun-off REIT entity has already helped out its former parent, agreeing to buy several properties in exchange for $337.5 million in rent credits.
To top it all off, the company has another catalyst at play. As InvestorPlace’s Ian Cooper wrote May 22, the company’s investment in Barstool Sports could help them grow their budding sports wagering business.
PENN Stock Is Not Your “Best Bet”
Casino reopenings, along with excitement over the company’s sports betting catalyst, have led investors to bid up Penn National shares as of late. Should you join in, as it seems the stock could head back to past highs pretty soon?
Not so fast! As I highlighted last month, other opportunities could offer a better risk/return proposition. PENN stock? Not so much. In short, this isn’t your “best bet” on a casino industry rebound.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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