A wave of legalization of sports gambling has arrived in the United States. 22 states and Washington D.C. have legalized the activity since 2018, and three more states (Louisiana, South Dakota, and Maryland) have that choice to make on their ballots this election cycle.

Companies such as DraftKings, MGM Resorts International, and a plethora of gambling SPACs are garnering most of the investing hype, but Penn National Gaming (NASDAQ:PENN) seems to be the ideal way to play it. Here's why Penn National Gaming is a strong buy.

A football, two bet tickets, and some hundred dollar bills.

Image source: Getty Images.

Business is holding up well

It should come as no surprise that amid the COVID-19-induced lockdowns and mandated social distancing, Penn's casinos, and the casino industry in general, suffered greatly. But considering that, what's impressive is that the company's third quarter revenue fell just 12% year over year. Additionally, net income grew 227% in the same time frame, to $141.2 million, along with a slight expansion in operating margin, and record high EBITDAR (EBITDA plus rent) margin.

How is a casino business performing so well amid such difficult times? Simple: Penn's casino portfolio is entirely made up of regional, drive-to properties, not international destinations. This means the company's clientele is more local and therefore less reliant on air travel to access Penn's locations. As the global health pandemic persists, local access to casinos is proving to be an advantage. 

While MGM and Wynn Resorts continue to see earnings estimates plummet due to a far heavier reliance on international travel, Penn is now expected to earn $1.39 per share next year versus $0.17 just three months ago.  Rolling out online gambling platforms will not be cheap, and this source of cash helps ensure Penn can compete as effectively as possible in the growing sports betting space. To further boost liquidity, the company did raise close to a billion dollars in new equity last month. It used the proceeds to pay down $670 million in net debt, thus deleveraging its balance sheet considerably.

Penn's brick-and-mortar properties will not be where the company creates investor excitement or company growth. It will, however, be the source of funds to pay for the growth projects Penn is orchestrating.

The Barstool difference

Early this year, Penn National bought a 36% stake in Barstool Sports valued at $450 million, and options to increase its stake to 50% in the future. Barstool is a sports media empire boasting 66 million monthly active users, roughly 100 million social media followers, and two of the top 30 podcasts in the country.

Last month, Penn and Barstool jointly debuted Barstool Sportsbook, a digital sports betting app now available in Pennsylvania. The early success has been astounding. In its opening weekend, Barstool Sportsbook surpassed DraftKings' and FanDuel's preliminary download records. Penn's and Barstool's platform now boasts 48,000 Pennsylvanian users as of Penn's most recent update.

To fully grasp this accomplishment, we need to understand that Barstool Sportsbook is only open in one state, compared to several states for competing products, and that its product is still very new. Additionally, Penn spent virtually nothing on external marketing -- the company merely needed to rely on Barstool's gigantic army of fans for the sports-book to enjoy outperformance. As of today, the product's total annualized handle (total bets taken) is $720 million, and that should grow exponentially as the platform continues to embark on its staged rollout.

Penn plans to debut its Barstool Sportsbook in Michigan later this year before expanding to more states thereafter. CEO Jay Snowden frequently reiterated how pleased he was with the profitable growth Barstool is bringing to the table, not to mention the far lower customer acquisition cost compared to alternatives -- that is a winning combination.

Beyond digital sports-books, Penn is actively shifting its brick-and-mortar assets to the Barstool brand, as well as creating new "stand-alone Barstool-branded entertainment destinations in key markets". This will be instrumental to fully realize the omni-channel potential of this duo.

Go with Penn

Snowden and his team clearly seem to understand how powerful Barstool can be for their company's future success. Penn's regional casinos provide the firepower to invest in growing the Barstool name, and so far that investment has been quite fruitful. When going with a stock in the sports gambling field, bet on Penn for the long term -- I think you'll be happy you did.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.