Markets

Is Penn National Gaming Stock a Buy?

The gambling industry in the U.S. has been turned on its head in the last four months, but you wouldn't know it based on some of the stock prices. Penn National (NASDAQ: PENN) has actually seen shares rise 15% since the start of the year, outpacing the market overall. 

Investors seem to like Penn National's announced move into online gambling with its Barstool Sports brand. But that may not be enough reason to buy the company long term

A roulette wheel with a black background.

Image source: Getty Images.

The drop in Penn National's business

We haven't seen the full impact of COVID-19 on Penn National's results, but you can see that first-quarter 2019 results are down sharply given the shutdown in the last few weeks of the period. 

PENN Revenue (Quarterly) Chart

PENN Revenue (Quarterly) data by YCharts

April and May will essentially be a complete loss because resorts were closed to customers. Revenue will likely be down sharply for the foreseeable future because travel is restricted and corporate events that help drive midweek revenue are almost all cancelled. 

But the drop in business during 2020 doesn't seem to be a concern for investors. Instead, they see this as a long-term growth stock for one big reason. 

Can online gambling drive Penn National?

Investors got excited over the announcement that Barstool Sports, of which Penn owns 36%, will enter online sportsbooks with the help of Penn National. Penn National will provide the gambling arm of the venture, but it's Barstool's brand that investors hope will attract customers.

The idea may be good, and investors have been excited about any name with online gambling exposure, but the market may not be as big as you think. Only 11 states currently allow online sports betting, and even fewer allow online casinos or poker. In states where online gambling is legal, there's lots of competition.

Penn National and Barstool Sports might be decent brands in sports betting, but I don't think they would outweigh betMGM, DraftKings, FanDuel, or The Stars Group's Poker Stars. These are big names with a big head start in online sportsbooks and casinos. 

Penn National isn't giving investors great odds

If you want to own a casino stock that has a lot of potential in online gambling, MGM Resorts (NYSE: MGM) has a huge lead on Penn National and a better-known brand. I also think we're a long way from online gambling in any form being widespread in the U.S., so buying Penn National because of Barstool Sports' new sportsbook play is a bad idea. 

The other factor to consider is that traditional resort and casino revenue could take years to recover. Penn National may be lucky to break even on EBITDA over the next two years, and then it'll have to kick the debt can down the road. That doesn't give investors much value, which is troubling given the fact that the stock is up this year. 

I don't think investors are getting good odds in Penn National today, and that's why I'm staying away from the stock. 

10 stocks we like better than Penn National Gaming
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Penn National Gaming wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of June 2, 2020

 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

PENN MGM DKNG

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More