Penn National: Winning On In Its Profit-First Strategy

Feb. 17, 2022 7:37 AM ETPENN Entertainment, Inc. (PENN)12 Comments
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  • Penn National enjoys a growing demand from online sports betting, which is identified by the management to bring long-term growth.
  • Its new 'Interactive' segment contributes an outstanding growth for the company.
  • Its profit-first strategy is one of the safest paths to long-term growth without incurring excessive marketing expenditures like its peers.
  • The company is investing in technological advancement to cater changing customer demographics.
  • Its disciplined customer acquisition approach makes the company distinct over its peers and currently cheap at today’s valuation.

online casino and gambling concept, hand touching shining sign 777 and dollars symbols, blue horizontal neon banner

Sergey Shulgin/iStock via Getty Images

The gambling industry has seen significant growth over the past few years. Like any other industry, this industry has been changing and adapting to the digital revolution. One of the most popular today is online sports betting across the US, as more and more local legislators have legalized it to help balance their budgets. Penn National Gaming (NASDAQ:NASDAQ:PENN), as one of the profitable companies in the industry, is making its way towards digitalization. PENN Media has completed significant acquisitions, such as Score Media and Gaming Inc., as well as a minority stake in Barstool Sports, establishing PENN as North America's most powerful sports media company.

According to the management, PENN has the "nation's largest portfolio of regional gaming assets" that are generating significant and sustainable free cash flow. Owing to their profit-first strategy, PENN is well positioned to face its competitive environment without taking uncontrolled risk unlike its peers. This makes PENN as one of the most safest bet in the gambling industry with a clear focus towards digitalization and a distinct ecosystem. PENN strengthened both its income statement and balance sheet and is relatively cheap at today's price.

The PENN Way: Profit-First Strategy

PENN completed a meaningful acquisition of its Score Media and Gaming Inc ("theScore") in exchange for approximately $2.0 billion and together with its investment with Barstool Sports, the management envisions PENN to be a complete one-stop entertainment destination and will transform Penn National as a major gaming and entertainment company. PENN has a very distinct way to control its cost to make a revenue. It achieved organic growth and cost-effective customer acquisitions, establishing a sustainable ecosystem that eliminates the need for third-party content fees.

Penn National Gaming- In-House Game Studio

Q4 2021 Earnings Call Presentation (pngaming)

PENN leveraged on its existing audience from Barstool Sports and was able to facilitate cross-selling opportunities, which achieved the best value for its shareholders. Its Penn Game Studios has set a future game roadmap that will reduce cost which will drive margin expansion while enhancing its customer experience. PENN is well-positioned to benefit from the growing online sports betting industry in the US, which is expected to reach $37 billion in 2025, growing at a CAGR of 31.25% from $9.7 billion in 2020. On top of its meaningful acquisition, PENN has launched a new segment called 'Interactive', as they focus on developing a cost-effective sportsbook app. PENN demonstrates an exceptional growth in its investment, resulting in a positive trend, as illustrated in the image below:

Penn National Gaming Interactive Revenue

PENN's Interactive Revenue (Q4 2021 Report, Prepared by InvestOhTrader, Amounts in Millions)

PENN's growing interactive revenue shows an outstanding growth compared to its 2019 performance, a year after the expansion of sports betting in the US. It is also notable how the company's Interactive revenue grew relative to its total top line, implying a lesser risk from operating interruption related to the pandemic. PENN, however, is still at risk of negative effects from the pandemic due to the fact that the majority of its revenue is still generated through traditional or offline operations.

With the expectation of continued recovery from the pandemic, PENN is also well prepared, as they continue to upgrade their technology to meet the changing demographics of their identified customers. Apart from its focus on online sports betting, PENN is also investing in the digital transformation of its retail operations. One of the investments that continues to benefit PENN is their customer loyalty program through MyChoice, where customers receive freebies and discounts. Their MyChoice loyalty app has already 750,000 downloads and is recognized by 25 million users, which provides wallet solutions ("cardless, cashless, and contactless solution"), further enhancing its ecosystem. According to management, this new technological advancement not only improves customer service, but also provides relief from the labor market's challenges. Another value-adding factor for PENN is that, despite the pandemic, the company has continued to expand its footprint across North America, growing from 41 properties in 2020 to 44 properties in 2021. With an increasing number of retail properties and a growing presence in online sports betting and iCasino, PENN is, in my opinion, significantly better than it was last year.

PENN Is More Disciplined Than Its Peers

Penn National Gaming Marketing Approach

Q4 2021 Earnings Call Presentation (pngaming)

As illustrated in the image above, the solid result of its profit-first strategy is its marketing and promotion performance over its peers. In both gross and net gaming revenue, PENN achieved the most efficiency on marketing expenditure.

Sports Betting Customer Profitability

Q4 2021 Earnings Call Presentation (pngaming)

With its disciplined customer acquisition cost and high retention rate, Penn National enjoys a short payback period within 2 to 3 quarters only and the management expects a 2.2x return of investment within 1 year. While this is beneficial in terms of providing a sustainable profit to shareholders, their strategy carries a higher risk relative to their market share.

Barstool Sportsbook Market Share

Q4 2021 Earnings Call Presentation (pngaming)

It is worrying to see that its handle market share in Pennsylvania is slowing, as shown in the image above, because Pennsylvania Market derives over 90 percent of the total handle from online operators, implying PENN's potential problem on its Interactive segment's growth. However, management believes that a more appropriate metric to examine is net gaming revenue, which takes marketing expenses into account. As illustrated in the image above, PENN has clearly increased its NGR market share and is continuing to expand its margins over the long term.

So Cheap at Today's Valuation

PENN Stock vs peers relative valuation

PENN's Relative Valuation (Data from Seeking Alpha and Yahoo!Finance, Prepared by Author )

Red Rock Resorts (RRR), Boyd Gaming (BYD), DraftKings (DKNG), Wynn Resorts (WYNN), Caesars Entertainment (CZR), MGM Resorts (MGM), Flutter Entertainment (OTCPK:PDYPY), Las Vegas Sands (LVS)

PENN trades at 1.28x trailing P/S ratio relatively cheaper than its peers average of 3.86x. Additionally, its trailing P/E of 19.28x is a bit expensive compared to its profitable peers' average of 17.60x. Its trailing EV/Sales and EV/EBITDA multiple, on the other hand, is considered as undervalued compared to its peers' average, as demonstrated in the image above. With an implied 3.42x P/S ratio, an estimated $6,660 million revenue in 2025, and a 15% discount rate, PENN could reach $69.64 conservatively.

Pullback, MACD Bullish Crossover

Penn National Stock Weekly Chart

Penn National Weekly Chart (TradingView)

PENN is currently trading at an interesting zone above its 2020 breakout point. A breakout of its 20 day simple moving average could create bullish price action in the coming weeks. As of today, its 200 day simple moving average is acting as a support in confluence to its prior breakout point, while its MACD indicator shows a bullish crossover, implying a potential bullish price action as well.

Conclusive Thoughts

PENN's top line increased 65% YoY to $5,905 million this year from $3,578.70 million in 2020, and 11% YoY from $$5,301.40 million. With such an outstanding growth on its topline, it snowballed to a positive bottom line of $420.5 million and an improving net profit margin of 7% compared to 2020 loss figure and 1% net profit margin in 2019. On top of its improving income statement, PENN shows improved liquidity with its record low of lease adjusted net leverage of 4.1x. Its profit-first strategy makes Penn National a safer bet than its peers, while securing sustainable growth in both retail operation and online sports betting. PENN's positive bottom line compared to the market leaders in online sports betting, like DKNG and PDYPY, is enough reason to make this stock more attractive. PENN is a buy at its current valuation and today's price action.

This article was written by

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Hi there! I am an equity research analyst by profession but a trader by heart, with a background in accounting. I try my best to be a responsible investor, guided by my expertise in fundamental and technical analysis. I enjoy surfing and riding the trends about equity, currencies and cryptocurrency. With a little over 5 years of experience in the market, I enjoy keeping my mind open to fresh ideas from different investment viewpoints since it allows me to expand my knowledge in this wild, but always energizing investing industry. PS. I apologize if I am unable to respond to your feedback immediately. However, when I have free time, I read through it all and enjoy reading both positive and negative feedback. Thank you!

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PENN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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