Q3 earnings just dropped for Penn National Gaming this morning and they were strong, as anticipated. The positive results lead to Penn National reporting $1.13 billion in revenue for Quarter 3 slightly beating the consensus expected of $1.1 billion.
In Q3, Zacks Consensus estimated a growth of $.48 per share, which is up from $.38 per share a year ago. This estimate shows a 26.3% growth from Q3 of 2019. Penn National showed growth of $.93 per share in Q3, This outperforms Zacks’ estimate by $.55 per share or 90%. A huge win for PENN.
In a preview to the results reported above, PENN released a slideshow presentation on Sept. 29. They reported an 18% increase in EBITDAR (Earnings Before Interest, Taxes Depreciation, Amortization, and Rent) which is a significant increase.
This morning, PENN reported excellent EBITDAR of $452.6 million in Q3 vs. $407.9 million consensuses. This mark is a quarterly record for Penn.
Penn National has done quite well recently when they beat Q2 projection as well. In fact, Penn National Inc. was able to beat Zacks Consensus Estimation by 31.31% in Q2. Their 18% growth in Q2 came as a surprise with the COVID-19 pandemic uncertainty. Their strong results in Q2 are a testament to the way that Penn National Inc. has committed to a changing landscape.
President and CEO Jay Snowden said as much in their Q3 earnings report: “The current operating environment has demonstrated the resilience of our teams and operations as we’ve made significant modifications to our business model to respond to the new volumes, offerings, and ongoing restrictions.”
Investors are able to breathe a sigh of relief now that they have officially reported strong Q3 earnings. However, in the weeks leading up to the earnings report, many have speculated that PENN is overvalued.
Does Penn National Have Too Much Debt?
Penn National does not come without risk. In their Q3 earnings report, Penn National reported a 4.9:1 debt to EBITDAR ratio. This is slightly down from the expected 5:1 debt to EBITDAR ratio. This means that Penn has five times more debt than their company’s overall financial performance.
They were able to raise $982 million when they made shares available at market price in September. This undoubtedly helped PENN bring in more money and lower their overall debt. This money will help bring Barstool Sportsbook across the country while, “fortifying our balance sheet.”
In their Quarter 3 reporting, Penn National reported $1.9 billion in cash on hand. Up significantly from $1.244 billion at the end of Q2.
Several analysts have mixed opinions about their debt tolerance. For instance, based on the high amount of debt that PENN holds, the Macquarie Group did show significant optimism for the rising gambling company. Their price target for PENN was listed at $66 per share and given a “neutral” rating according to a report published on Sept. 24.
Conversely, Rosenblatt Securities gave PENN a “buy” rating published on Sept. 30. Their target stock price for PENN is $90 per share.
The Macquarie Group is not alone in its estimation of Penn National Inc. On Oct. 16, Morgan Stanley placed an “equal weight” rating on Penn National who was trading at $69.34 per share at the time. Furthermore, Morgan Stanley’s placement of $63.00 per share would imply a 9.14% decrease in their sale price at that time.
One analyst for InvestorPlace is a little bit more bullish on the gambling company. When discussing potential FCF of $700 million, Mark Hake wrote, “That implies the market cap should be between $17.5 to $20 billion. This means a stock market gain of 66.67% to 90.5%. In other words, PENN stock is worth between $100 to $114 per share.”
Moreover, while this is ambitious, the potential remains in the future for that kind of market cap.
With all of these assessments in mind, it is important to recognize that Penn National has taken a bit of a downward turn. Much of this can be attributed to COVID-19 related complications. PENN ended Wednesday trading at $56.59 per share.
Record-Breaking Barstool Sportsbook Launch Fuels The Way
In September, Barstool Sportsbook launched under the umbrella of Penn National. The results have been quite positive. In their Q3 earnings report, Penn National reported that nearly 48,000 people in Pennsylvania alone have registered to use the app.
In addition, PENN reported, “over the course of the first 37 days of operation, the app generated a total handle of $78 million across 30,000 first-time depositors.”
However, Barstool Sportsbook is only available in Pennsylvania at this time. Since then, they announced their intention to launch in the sports betting market of Illinois, as well as Colorado, and Michigan. Their launch in those states could be massive for PENN’s valuation going forward.
Assuming Michigan launches mobile sports betting in 2020, Barstool Sportsbook intends to be one of their first to debut. They already have a retail casino at Morgantown Casino.
In the investor presentation on Sept. 29, PENN plans to launch next in Colorado and Illinois. In addition, Colorado and Illinois are followed by Indiana, New Jersey, Virginia, and West Virginia in 2021. While it is no slam dunk that Barstool Sportsbook launches in Colorado and Illinois in 2021, it does show their willingness to push their product. It is ready for the market now.
Clearly, PENN believes that as they are able to bring their product to new states, Barstool Sports’ personalities will have users engaged to use their sportsbook app. Reporting, “39% of our customers (have been) placing wagers on bets promoted by the Barstool personalities.”
Snowden concluded the earnings report by saying, “We look forward to an exciting finish to the year as we introduce Barstool-branded retail sportsbooks across our portfolio and, subject to final regulatory approval, the launch of our Barstool Sportsbook app in Michigan.”