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Penn National Up 29% YTD: Can the Rally Continue in 2020?

Zacks Equity Research

Penn National Gaming, Inc.’s PENN strong brand presence, focus on sports betting, margin expansion strategy and acquisitions bode well. Year to date, the stock has gained 28.8% compared with the industry’s 19.4% rally. However, stiff competition from various casinos and video lottery remains a concern. Let’s delve deeper.

Growth Drivers

Most of the gaming companies are now banking on sports betting following its legalization outside Nevada. In an effort to expand its sports betting footprint, the company has partnered with DraftKings, PointsBet, theScore and The Stars Group. These partnerships will help the company to maximize sports betting and iGaming across 19 states. DraftKings will cover Florida, Missouri, Ohio, Pennsylvania and West Virginia for 10 years. Additionally, the company stated that sports betting is gaining popularity in Ameristar Casino Council Bluffs, thanks to the opening of a retail sports book at Ameristar Casino Council Bluffs in Iowa and two retail sports books in Indiana during the third quarter.

During third-quarter 2019, the company opened retail sports book at the Meadows Casino in Western Pennsylvania. Notably, one of its skin partners recently launched online sports betting operations in West Virginia and Indiana.

The company’s margin is also improving due to ongoing refinements in procurement, marketing and labor management. In the reported quarter, the adjusted EBITDAR margin expanded 100 basis points to 30.1%. Meanwhile, Penn National remains confident about realizing $120 million of cost synergies by 2020, with at least $60 million in 2019 and $65 million by 2020. Subsequent to the Pinnacle transaction, Penn National expects to return to its net leverage on a lease-adjusted basis of 5.0x by the end of 2020.



Furthermore, Penn National is known for its acquisition strategies that help the company expand its presence as well as improve revenue yields. The company’s notable buyouts have been Margaritaville Resort Casino in Bossier City, LA, and Pinnacle Entertainment — a leading regional gaming operator. With the Pinnacle acquisition, the company added 12 new properties to its portfolio. In the first quarter of 2019, the company acquired two category 4 licenses in the bidding process in Pennsylvania. Each license can have up to 750 slot machines and 40 table games.

Concerns

Penn National is persistently facing intense competition from various casinos, video lottery, gaming at taverns and other internet wagering services. Not only gaming services but any form of leisure and entertainment activities including shopping, athletic events, television and movies, concerts, and travel put the company under competitive pressure. The company’s operations, therefore, are facing heightened competition with new entries in the already high-supply market.

Penn National, which shares space with Boyd Gaming Corporation BYD, Caesars Entertainment Corporation CZR and Century Casinos, Inc. CNTY currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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