Penn National Gaming (PENN) is among the top-rated gambling stocks as more states allow sports betting and online wagering. Is Penn stock a buy right now? Here is what the fundamentals and technical analysis say.
On April 7, New York state passed a budget with a bill to legalize online sports betting. The law has one last hurdle: a New York State constitutional challenge. In 2013, New York State voters approved a constitutional amendment to allow casino gambling at up to seven casinos in the state. In 2019, the state legalized sports wagering but not online sports betting, since sports betters had to place bets in person at an authorized casino.
Legal experts say the current law should pass muster. The law specifies that online sports betting is legal as long as the bettor is physically present in New York at the time of the transaction. The law authorizes New York’s State Gaming Commission to choose two platform providers to become mobile sports wagering operators based on a competitive bidding process.
The commission may allow more than two mobile sports wagering operators if it finds that doing so is in the best interests of the state and if the additional operators pay the same tax rate as the initial two licensees. Licensees must pay a one-time $25 million fee to the state. And the operator’s license will need to be renewed after 10 years.
Penn is the nation’s largest and most diversified regional gaming company. It has 41 properties across 19 states. The company’s properties feature about 50,000 gaming machines, 1,300 table games and 8,800 hotel rooms. Penn operates under brands that include Hollywood, Ameristar and L’Auberge.
But the pandemic is testing its ability to shift its business model to offset drastically lower casino foot traffic. Penn Interactive operates retail sports betting across the company’s portfolio, as well as online social casino, bingo and iCasino products.
To bolster its sports betting portfolio, Penn in February 2020 announced it had partnered with Barstool Sports in Pennsylvania. Barstool will exclusively promote the company’s land-based and online casinos and sports betting products, including Barstool Sportsbook mobile app, to its national audience.
Gambling laws passed in several states this election cycle, notably one that allows online sports betting in Maryland. Penn announced on Dec. 15 it entered an agreement with Gaming and Leisure Properties (GLPI) to purchase the operations of Hollywood Casino Perryville in Maryland for $31.1 million in cash. Penn is also leasing the real estate associated with the property for $7.7 million annually.
Penn CEO Jay Snowden said the acquisition “provides another opportunity to expand our unique omni-channel platform with a Barstool-branded retail sportsbook and mobile app.”
On March 11, Penn launched its Barstool app in Illinois, in time for the college basketball tournament March Madness, which ran from March 18 to April 5. The tournament usually brings in more betting revenue than the Super Bowl, which took in nearly $500 million this year, according to PlayUSA.com.
In January, Illinois took in nearly $600 million in sports bets, becoming only the fourth state to take in more than $500 million in a single month. Illinois is also home to one of Barstool’s top markets, Chicago.
New York is one of the Big Four states that would really move the needle for gambling stocks like Penn. The other three are Michigan, which already allows online sports wagering, Florida and California.
“New York is definitely a state we want to have access to,” Snowden said Feb. 4.
Penn Stock Technical Analysis
Penn stock has soared nearly 750% in the past year, as more states legalize sports gambling. Rival Caesars will also be added to the S&P at the same time.
Shares hit a new high of 142 intraday on March 15, on news that it would be added to the S&P 500 on March 22.
Penn stock was extended past a second-stage consolidation buy point of 76.72, MarketSmith chart analysis shows. Shares closed below their 10-week line on March 26 and have been trading below the key support level ever since.
The relative strength line turned sharply down is recent days, amid a difficult market. Penn stock has a Relative Strength Rating of 97 out of a possible 99.
With a Composite Rating of 74 out of 99, Penn is ranked No. 5 in the leisure gaming/equipment industry group behind leader Churchill Downs. The rating combines key fundamental and technical metrics in a single, easy-to-use score.
Penn stock is a component of the Roundhill Sports Betting & Gaming ETF (BETZ), which holds dozens of gambling stocks. BETZ’s top holdings include Penn, as well as rivals Flutter Entertainment (which owns FanDuel), DraftKings and William Hill PLC. BETZ has an RS Rating of 81.
Penn Earnings And Fundamental Analysis
The IBD Stock Checkup assigns Penn stock an EPS Rating of 74 and an SMR Rating of E, the worst possible rating, as the coronavirus decimated casino stocks with lockdown orders. The EPS rating reflects a company’s health on fundamental earnings metrics, and its SMR Rating gauges sales growth, profit margins and return on equity.
Penn had been struggling before the pandemic hit, with several quarters of losses or flat earnings. Then the bottom fell out in the first quarter, when it reported a $5.26-a-share loss. The following quarter was an improvement, but Penn still posted a loss of $1.69 a share.
Penn finally returned to profitability in the third quarter, posting EPS of 93 cents, a 145% surge from the year-ago period, and crushing views for 48 cents. It had net revenue of $1.13 billion, above views for $1.1 billion, but 17% below the year-ago period.
Many of the gains came from painful cost-cutting measures, including massive layoffs over the past several months, according to Casino.org.
But Penn posted a weaker-than-expected fourth quarter. It had EPS of 7 cents, and revenue sank 23% to $1.03 billion. Snowden said despite the miss, he is optimistic that the vaccine rollout will improve foot traffic at its brick-and-mortar casinos in the coming months.
Online Gambling Lifts Penn Stock
Penn’s partnership with Barstool Sportsbook is already proving to be a success. It has more than 72,000 registrations with a handle of $300 million.
Nearly all, 95%, of the registrations were new to the Penn ecosystem and not from its myChoice loyalty members, noted Wolfe Research analyst Jared Shojaian in a recent report.
“Penn pointed out that these results were generated with little external marketing, which the company believes highlights Barstool’s ability to convert its followers into its sports betting product,” he added.
Barstool took in $71.8 million in bets in Pennsylvania in December, raking in $13.9 million in revenue, according to company reports. Rival DraftKings handled more than $100 million in wagers but only made $5.4 million in revenue. Pennsylvania is the No. 3 betting market in the U.S., behind New Jersey and Nevada.
Penn launched its Barstool mobile app in Michigan on Jan.22. Snowden said Barstool registered over 48,000 new customers and generated total handle of $27.5 million during the first 10 days of operation.
“The value of Barstool Sports as a media company is an overlooked part of our story,” Snowden said. “Barstool Sports now has over 26 million followers on TikTok, close to 27 million followers on Twitter, and more than 52 million followers on Instagram, just to highlight a few social media platforms.”
Penn’s focus on online sports wagering is no surprise as more states look to gambling tax revenue to shore up budgets decimated by the pandemic.
After the Supreme Court ruled in 2018 to overturn a federal ban on sports betting, 25 states have passed laws allowing it. Voters approved sports gambling in Maryland, Louisiana and Colorado on Nov. 4.
Meanwhile, the online gambling market is slated to reach $127.3 billion by 2027, according to Grand View Research.
Younger Consumers, Cashless Transactions
In a recent investor presentation, Penn noted that 77% of handle from its Hollywood Gulf Coast property was from bettors under the age of 50 and 59% of handle from bettors under the age of 40, Shojaian said in a note. Penn also said that 80% of people who accessed the Barstool Sportsbook app were between the ages of 21 and 34 years old, which Penn finds encouraging.
And like nearly everyone else trying to make transactions safer during Covid, Penn plans to roll out touchless technology sometime in 2021.
“On the land-based side of our business, we believe there is real momentum in moving toward cashless technology that should not only improve efficiency and customer service, but also result in incremental revenue as we appeal to a younger demographic that expects a cashless transaction experience in their daily life,” CEO Snowden said.
Is Penn Stock A Buy Now?
While the market for online gambling is growing and can be a promising revenue stream for Penn, analysts caution there could be bumps in the road. Three of the so-called Big Four states still do not allow sports betting. New York and Michigan recently passed laws allowing sports wagering, but California and Florida have not.
Penn stock has soared to record highs, but has since retreated below its 50-day moving average.
Bottom line: Penn stock is not a buy as it is not in a buy zone while falling below key benchmarks, the 50-day and 10-week lines. While the stock is not yet flashing clear sell signals, investors should take note. Still, as a leader in the booming sports betting market, investors should keep an eye on this stock for future buying opportunities. Also note that while the company is making a profit again, strong sustained growth hasn’t returned yet.
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.
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