Has Penn National Gaming Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Penn National Gaming (Nasdaq: PENN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Penn National Gaming.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

3.2%

Fail

 

1-Year Revenue Growth > 12%

5%

Fail

Margins

Gross Margin > 35%

41.3%

Pass

 

Net Margin > 15%

8.3%

Fail

Balance Sheet

Debt to Equity < 50%

98.4%

Fail

 

Current Ratio > 1.3

0.98

Fail

Opportunities

Return on Equity > 15%

12.7%

Fail

Valuation

Normalized P/E < 20

18.08

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Penn National Gaming last year, the company's score has gotten cut in half. But the stock hasn't done that badly, rising almost 15% over the past year.

With so much of the attention in the gaming industry going to Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (Nasdaq: WYNN  ) and their flashy Asian casinos, Penn National is almost an afterthought. But in the long-forgotten domestic gaming market, Penn National has made some great deals, having bought a St. Louis casino from Caesars Entertainment (Nasdaq: CZR  ) earlier this year at a very attractive price. With casinos throughout the country and centered in the eastern U.S., Penn National is a giant in the domestic market.

But not everything has gone well for Penn National lately. For rival Boyd Gaming (NYSE: BYD  ) , the second quarter brought bad news, as poor acquisitions and bad margins combined to send the stock plunging. For Penn's part, its properties have struggled to post any growth at all in operating income, and it's unclear whether new projects in Ohio are ideal ways to pump up growth going forward.

In its most recent quarter, Penn National suffered year-over-year drops in both revenue and earnings, but shareholders seemed pleased with the results. The stock rose more than 3% after the report came out, although it has since given back all that ground during the market's overall swoon.

For Penn National to improve, it needs to keep having success with its new and proposed gaming projects across the country. If it can keep up the pace and dominate the local competition, Penn National could claw back all the ground it lost in its quest for perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Penn National has filled the void Las Vegas Sands and larger rivals created when they focused on Macau. Sands is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our premium report on the company, where we answer the question of whether Las Vegas Sands is a buy right now. We're providing a full year of analyst updates to go with it, so make sure to claim your copy today by clicking here.

Click here to add Penn National Gaming to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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