The legalization train for regulated American sports gambling has left the station. New athletic seasons now bring with them new wagering programs created and tweaked by state governments. Mobile betting books are rapidly being set up across the nation to address soaring demand.
With the coronavirus having such a drastic effect on state budgets, this momentum has no reason to slow. It seems many states in our country are finally confronting their lack of control over sports betting and deciding they may as well extract some tax revenue from the transactions in the process.
Some investors are eager to take part in this evolution toward the acceptance of sports gambling. A high flier like DraftKings Inc. (DKNG -2.31%), with its impressive growth and popular platform, is one choice for investors wanting to get in on the action. Penn National Gaming (PENN 2.48%), however, may be the better option for three compelling reasons.
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1. A return of sports
It's clear there will be an eventual return of organized sports, which were halted to help slow the spread of the coronavirus pandemic. For Penn National to succeed, these sports need to be played again and people will need to watch. All available evidence suggests both of those things will happen.
Recent sporting events by NASCAR, UFC, the professional golf leagues, and the NFL all broke viewership records with wagering activity also ticking up considerably. That's great news for Penn National. Any stickiness to this trend provides high-margin revenue for all legal gambling entities. With sports books in every Penn National Gaming casino property, and large investments made to build out its sports gambling platform, the return of live sports is certainly a welcome site for Penn. These company-specific catalysts only elevate my bullishness about the stock.
2. Penn National's secret weapon
When sports do finally return, Penn National's newly minted Barstool Sports partnership will be a big boost to operations. Barstool is an immensely popular sports and pop culture blogging venture, boasting tens of millions of loyal sport-loving followers. Penn National acquired the rights to 50% of Barstool at a valuation of $450 million.
Later this year the combined entity will rerelease its sportsbook under the name Barstool Sportsbook to appropriately leverage the gigantic following. Gamblers will be able to access the platform online or in person at a Penn National gaming facility. This partnership creates an omnichannel approach to gambling that could generate real revenue growth. Barstool will be key to Penn National more effectively taking market share in a competitive landscape that includes powerful players like DraftKings and MGM. The revamped book will feature in-game betting and all the personalities that make Barstool ubiquitous with sports fans, and it will provide an impressive growth story within gambling as a whole.
3. Diversified gaming footprint
Penn National's diverse financial exposure is also attractive. At the very top of its first-quarter earnings release in early May, the company states in bold letters: "Penn to benefit from nation's most diversified regional gaming footprint." No state generates more than 15% of the company's revenue. Penn's lack of dependency on a specific region frees it from over-reliance on any single state. If a hurricane, racial tensions, or a pandemic forces a region to close temporarily, Penn is well-positioned to endure.
Coronavirus outbreaks in the Northeast and West Coast were more severe than the rest of America. Investors should feel more comfortable when a company's assets are spread out like Penn's are. CEO Jay Snowden's company has exposure in regions such as the Midwest and South, which should benefit from the more expedient recovery already beginning in relation to COVID-19.
Furthermore, Penn National's Las Vegas properties are downtown, not on the Strip. Snowden's convenient tilt away from the iconic Las Vegas strip diminishes a fragile reliance on air travel: Strip casinos are more global businesses that rely on travelers from elsewhere and international flight traffic to drive sales. Penn National's Las Vegas properties tend to attract more regional patrons that are likelier to drive to its facilities, which has helped as flight demand amid COVID-19 has been greatly reduced.
Staying power and value
These three features of Penn's business model should provide solid growth tailwinds for the stock, but the company first has to get through the coronavirus fallout to take advantage. I'm confident they can. Snowden captured liquidity breathing room recently, initiating a successful $500 million convertible notes raise to bring its cash position over $700 million. The interest rate is 2.75%, not bad compared to some of the cruise companies paying 10% or more on their lines of credit.
The company's cash burn sits at $83 million a month with zero sales, giving it a nine-month leash for a sales rebound. But a rebound could come sooner. On May 20, Penn announced a reopening of 25% of its regional gaming assets with more openings expected in the coming weeks. Las Vegas casinos also opened this past week in a limited capacity. Based on this, a nine-month zero sales scenario is unlikely, suggesting that Penn National Gaming has staying power.
Based on pre-coronavirus results, Penn National stock has been trading at a P/E ratio of roughly 17 and at seven times operating cash flow. Both are cheaper valuations than the S&P 500 overall (currently at a P/E ratio of 23).
When the gambling industry does move past this health and economic crisis, Penn's future looks bright. Its brick-and-mortar facilities are in the right places, and Barstool sports is a powerful catalyst for taking share in a young sports gambling industry. Even with the recent run Penn National Gaming's stock has had (it was trading near all-time highs on June 4 and has recovered nearly all its coronavirus-related stock price dropoff), I am a buyer for the long term.
