Shares of regional casino operator Penn National Gaming (NASDAQ:PENN) were higher by roughly 14% at 2 p.m. EDT today. You don't have to think too deeply here: Las Vegas has reopened for business. But the excitement around Penn National is a little different than you might think.
The news that Las Vegas casinos are reopening is very good for the entire industry. With ample media coverage, it's basically a giant "Welcome back" sign to anyone who likes to gamble. The problem for Las Vegas is that it is a destination: a big trip that you plan to do over a long weekend with the boys (or girls). With air travel still suffering from concerns around COVID-19, it will probably be a long time before gambling in Las Vegas is back anywhere near its former levels. And that's on top of occupancy restrictions related to the coronavirus.
Penn National Gaming, on the other hand, had its first big reopening on May 18. Just before the Memorial Day weekend, the casino operator reopened 10 gambling venues along the Gulf Coast. These aren't places you fly to, as much as places you drive to; they are more-local venues. And it appears that business was brisk. The Sun Herald in Biloxi reported that casinos in Mississippi made more over Memorial Day in 2020 then they did in 2019. Clearly there's some pent-up demand.
Based on the price gain in Penn's shares today, meanwhile, investors appear to have decided that casino operators with a more-local clientele are the hot ticket as the industry reopens. Not a bad decision, especially since the Las Vegas reopening helps get the news out that gamblers can finally get back in the game.
Running a casino is a tough business. It can be highly profitable when times are good, but companies can bleed red ink when times are bad. Right now, the industry is coming back from being completely shut down, and investors are excited. That's understandable since financial performance can only get better after companies were forced to come to a full stop.
But the efforts to combat COVID-19 that led the industry to close up are also likely to result in a recession. If that occurs, the reopening process will have yet another headwind. Long-term investors should expect continued volatility in the gambling space.