In early 2021, Penn Entertainment Inc. (PENN, Financial), formerly known as Penn National Gaming, was a $25 billion company. Today, it is worth around $4 billion, which is a good thing for new investors.
While a Supreme Court ruling in 2018 opened gaming activity to other territories outside of Las Vegas, it has taken time to roll out legislation. Since that decision, more than 30 states and the District of Columbia have legalized sports wagering, driving the betting revenue to $7.5 billion in 2022 from just $430 million in 2018, according to the American Gaming Association. With Data Bridge Market Research projecting the sports betting market market will reach $297 billion by 2030, this is a huge growth opportunity for Penn.
Overview
Penn Entertainment operates casinos, but is also involved in horse racing, sports publishing, entertainment and the iGaming industry. Founded in 1972, the company has 43 properties in 20 states under various brands, including Hollywood Casino, Ameristar and Boomtown. It also offers sports betting in 15 jurisdictions and online casino gaming in five under newly acquired brands Barstool Sports and TheScore.
The company's history begins with the enactment of a Pennsylvania law in 1967 that allowed thoroughbred horse racing with parimutuel wagering. Two companies that later formed part of Penn National Gaming were founded in 1968, one of which was awarded a license and began construction on the Penn National Race Course, which opened in 1972. In 1982, the race course was purchased by Carlino.
The companies were reorganized in 1994 in preparation for an initial public offering. Penn National Gaming became a public company on the Nasdaq in May of that year.
Penn expanded beyond its first racetrack with acquisitions of other racecourses and casinos, becoming a significant player in the casino industry. In other words, there is a solid story behind this stock that provides more brand durability.
Acquisitions to diversify
The company’s latest bolt-on acquisitions - TheScore and Barstool - give it access to younger user bases. Each platform has millions of daily active users and with gambling becoming more widely available, it will probably not be long until its sports book sees plenty of transactions flow through these apps.
Penn has been forced into publishing and entertainment out of necessity. The demand for gaming in the United States is lower than in regions such as Macao and Singapore, where there is a much higher proclivity toward gambling.
In the U.S., there are approximately 1,000 commercial and tribal casinos catering to a population of 334 million. This number far surpasses the limited availability in places like Macao, which has 36 casinos, and Singapore, which has two.
Further, Penn's industry faces constant competition due to the expansion of wagering options by individual states and continuous renovation efforts by operators to enhance their existing offerings. Even though states are opening their doors to gambling, it does not mean the platform will be able to compete profitably.
Only time will tell if these acquisitions lead to jackpot growth, but sports betting and iGaming are lucrative markets. Penn is well positioned to see growth in these areas. In fact, expectations are that 2023 will mark the first year in which its interactive business generates an operating profit and by 2027, close to 24% of the company's total sales will be generated from its interactive business, a significant rise from 10% in 2022.
Solid financials
Penn had an impressive liquidity position of $2.5 billion at the end 2022, which, coupled with an estimated free cash flow generation of $4.20 billion through 2027, places the company in a favorable position to manage its debt obligations while continuing to grow. It has $1.30 billion worth of debt scheduled to mature in 2026-27, so it should be well-equipped to meet these financial commitments.
More importantly, other than during the first year of the Covid-19 pandemic, Penn has seen growth in sales every year for the last decade, going from $2.7 billion to over $6.5 billion in the last 12 months with total net income since 2020 of more than $1.3 billion. Again, the market cap is just shy of $3.8 billion. It also has total equity of $4.1 billion and cash per share of $8.60.
Competitive landscape
Although Penn's loyalty membership of 27 million falls below Caesars' (CZR, Financial) 65 million and MGM's (MGM, Financial) 40 million, it now possesses valuable media and technology assets. Through its ownership of Barstool, Penn enjoys an audience of over 100 million monthly active users, while TheScore provides a technology platform that offers increased control and innovation, as opposed to relying on a third party.
Penn's share of the domestic gaming market was around 11% in 2022, lagging behind Caesars and MGM with 18% and 20%. The company's top competitors mainly benefit from a higher proportion of their portfolios located in Las Vegas compared to U.S. regional markets. In other words, as more states legalize gambling and allow Penn to enter, the balance of revenue share will move more in Penn Entertainment's favor.
With the stock down 80% since March 2021, the underlying value has only been strengthened since that point. Now trading at less than 6 times earnings, it looks like a massive bargain.
