Penn National Gaming's (PENN 3.75%) stock has recovered substantially since it cratered at the pandemic's onset. The company owns and manages 41 gaming properties in 19 states. Most of its locations have reopened after shutting down during the pandemic, but the recent surge in coronavirus cases puts its ability to stay open in jeopardy.
Still, with positive news on multiple coronavirus vaccines, it appears that it's only a matter of time before the company will return to operating at full throttle. In the meantime, its foray into online sports betting is taking off extremely well and has investors excited about its potential. Let's take a closer look at the company to determine if this is a good time to buy Penn National Gaming stock.
Penn National Gaming is partnering with Barstool Sports. Image source: Getty Images.
The growth will come from expanding sports betting options
Penn National Gaming has been a successful gaming operator over the last decade, able to grow revenue and maintain an operating margin in the double digits. The company got a major assist in May of 2018 when the Professional and Amateur Sports Protection Act (PASPA) was overturned. This paved the way for more states to legalize sports betting outside of Nevada, and 21 states have chosen to do so.
In February, the company agreed to invest in Barstool Sports, a sports media company with more than 60 million monthly active users and more than 100 million social media followers. The agreement will grant Penn access to Barstool Sports' customer list and exclusive advertising rights for 10 years on the Barstool Sports platform. The arrangements should allow Penn a lucrative opportunity for customer acquisition.
In one way, it's already helping the company expand its offering of online sports betting in Pennsylvania with the launch of the Barstool Sports app in September. And even though it was only launched in one state, the app was the most-downloaded sports app the first weekend it became available.
The majority of Penn National Gaming's growth will come from online sports betting. According to CEO Jay Snowden, the company will be offering sports betting in every state in which it operates and where sports betting is legal by the end of 2021. That's a massive expansion from the current lone market in which it offers online sports betting.
Valuation seems fair
Penn is also the lower-priced alternative when compared with larger gaming companies Caesars Entertainment (CZR) and Las Vegas Sands (LVS -0.07%) (see chart). This is true when you measure the companies on price-to-sales ratio and enterprise value-to-revenue ratio.
Data source: YCharts.
The verdict
In the gaming industry, revenue is driven by consumers' discretionary income, or in other words, what's left over in people's wallets when they are finished paying for necessities. According to the Federal Reserve Bank of St. Louis, disposable income levels are higher than before the pandemic, in part because of the large stimulus package passed by the government. This could lead to an unleashing of pent-up demand for visits to Penn's properties when the pandemic recedes.
Because of its relatively fair valuation and decent prospects, after restrictions on attending sporting events are lifted, investors interested in this stock can feel good about adding it to their portfolios.
