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Can Penn National Gaming Live Up To The Hype?

This post is for my buddy Zach, who asked for a Hertz article several times only to have me decline. Spending a lot of time and/or energy on the topic of amateurs day-trading the equity of bankrupt companies just didn’t interest me. For the record, though, I remain long Hertz puts. Hopefully this post makes up for it, Zach, as I dig a little deeper into Penn National, a stock you bought in March in a wonderfully timed contrarian bet provided by that nasty darn virus called covid-19. This is not the first time I have mentioned Penn National Gaming (PENN) , the biggest regional casino operator in the United States. A little over a year ago I wrote about how cheap the stock looked at $18 per share . What has happened thus far in 2020 is worth expanding on. In late January, with PENN shares trading for $26 each (enterprise value of $5.2 billion) the company announced a deal to acquire a 36% interest in Barstool Sports at a $450 million valuation. PENN will increase its stake to 50% in 2023 on the same terms, and ultimately to 100% if it chooses (at a valuation no higher than $650 million). Barstool Sports is a digital media company with $100 million of annual revenue (2019 figure) that PENN hopes will help it ramp up its online betting platform across the country. Investors cheered the deal and PENN shares hit $38 per share by mid-February when the stock market was reaching its pre-pandemic peak. At that point, PENN’s enterprise value had jumped by $1.25 billion just from them investing $163 million into a company that both sides agreed was worth $450 million. Unsurprisingly, I saw this as a great chance to take a profit and move on. At the worst point in March, PENN stock hit a low of $3.75 per share as its casinos were closed due to the pandemic. That’s not a typo. To save cash PENN gave its landlord, Gaming and Leisure Properties (GLPI) , the land sitting beneath its Las Vegas casino in exchange for rent credits (full disclosure: while I sold PENN, I remain long GLPI both personally and for clients). That excessive sell-off was short-lived but you might be shocked to learn that PENN stock today fetches more than $55 per share even though its facilities are operating at limited capacity due to pandemic-related restrictions: So, what the heck is going on? The best I can tell, a couple of things. First, Barstool Sports founder David Portnoy has been live-streaming his new part-time daytrading career (twitter: @stoolepresidente) and the entertainment value has resulted in his followers gobbling up the stock on platforms like Robinhood. Second, Penn’s management team has been talking up the Barstool Sports deal with sell side analysts and many of them are jumping on the bandwagon. Last week Goldman Sachs put a $60 price target on the shares and this week Truist Financial bumped its target from $50 to $62 per share, the highest on Wall Street. Being the old fashioned quantitative investor I am, the first thing I do is recalculate the increase in PENN’s enterprise value since the Barstool deal was announced ($4.3 billion, with PENN’s E/V now standing at $9.5 billion) and compare it with Barstool’s annual revenue ($100 million) and the valuation Mr. Portnoy agreed to sell for ($450 million). The only logical conclusion is that partnering with Barstool is not worth anywhere near $4.3 billion to PENN shareholders and that this is yet another example of the equity market bubble in “story” stocks where the elevator pitch sounds great but the numbers don’t add up. As buddy Zach would say, “okay, so what do you do now?” Well, it depends whether numbers or hype inform your investing decisions. As a numbers guy, I would create a set of assumptions to form an “extreme bullish case” that goes something like this: Penn got a great deal and Barstool is really worth $1 billion, not the $450M they sold it for. In addition, the online gambling venture will boost Penn’s property level profits by 20% long term. Oh, and of course the pandemic will fade and people will eat, drink, sleep, and gamble as they did in 2019 starting in 2022. If Penn was worth $5.2 billion pre-pandemic, let’s add the 20% and then tack on another $1 billion for Barstool. Let’s even ignore the cash Penn will have to fork over to buy the rest of Barstool. We get to an enterprise value of $7.25 billion, or $39 per share. Call that an optimistic (but not completely insane) fair value estimate (and 50% above PENN’s stock price pre-deal). The current hype, though, follows none of that math. The bulls see the stock going up and thus believe it will keep going up. The analysts don’t want to look like idiots if they miss it (Penn is a top notch gaming operator after all), so they all slap $60+ price targets and buy ratings on the stock after this huge move higher (and they were neutral when the stock was in the 20’s in 2019 and sub-$4 in March 2020). The Portnoy contingent rejoices and counts their trading profits. Even CNBC’s Jim Cramer is bullish, this morning offering no quantitative evidence despite suggesting “the stock can go a lot higher.” And so it keeps going up, two more dollars today in fact. What would I do if I bought the stock during the pandemic-induced meltdown and woke up 5 months later to see it trading up 1,400% from the low and being pushed by the Goldman Sachs’s of the world now ? You can probably guess… I would be selling into the exuberance and making sure if I stayed long any amount that it was with just the house’s money. You can surely take that advice with a grain of salt, given that I sold based on my sub-$40 fair value estimate, but riding the momentum train has never been my game. I am quite content watching from the sidelines now and collecting the dividends from my boring GLPI shares. Be careful out there everyone, it’s crazy times.
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