Shares of casino operator Penn National Gaming (NASDAQ:PENN) jumped as much as 15% in the first hour of trading on Wall Street today. At this point the stock is up nearly 130% for the year, compared with just a 10% or so gain for the S&P 500 index. Although there was no material news out of the company, a positive analyst call further stoked investor excitement.
Operating a casino in the age of COVID-19 has not been particularly easy. First the government shut down nonessential businesses, which logically included gaming facilities like the ones run by Penn National. Then, when casinos were allowed to reopen, they did so with increased cleaning protocols and occupancy limits. In other words, Penn National and its peers were facing higher costs and lower revenue. So it might be surprising to see that Penn National has outperformed the market by such a wide margin, which is an anomaly in the gaming space. That, however, is likely being driven by the company's move into digital gaming.
This is a legitimate positive, since Penn National is bringing the games to customers who can't, or won't, go to a casino. That includes the company's plan to enter the online sports betting space. But it looks like investors are pricing in a lot of good news on the digital front since Penn National's physical business is still nowhere near back to normal. However, Wall Street's Craig-Hallum thinks there's a lot of room to go before Penn National's upside is exhausted. The firm pegged the casino operator's price target over the next year at $75 per share (it's trading in the upper $50 range today). But the long-term target could be as high as $200, according to Craig-Hallum, which rates Penn National a buy. With the stock up so much already this year, more cynical types might argue that $200 is an aggressive target, but only time will tell.
The casino industry has rebounded off the lows reached in the early 2020 bear market. Penn National Gaming has been one of the best-performing names in the space. And yet the industry continues to face notable pandemic-related headwinds. At this point only more aggressive investors should be looking at Penn National Gaming. Even then, you'd have to have a very positive view of the future to step aboard here.