Penn National Gaming (PENN -4.51%) operates regional casinos, a mobile sportsbook, and iGaming (online casinos). The company's brick-and-mortar operations suffered losses of revenue and profits at the pandemic's onset when they were forced to close temporarily.
But that part of the business has already recovered even as the U.S. still grapples with ongoing challenges around COVID-19, and that's just one of the reasons why investors should be closely following this company.
Penn National Gaming is improving efficiency
In the second quarter, Penn reported revenue of $1.55 billion, 17% higher than the same quarter in 2019. Customer visitation is improving both year over year and quarter over quarter as people are feeling less cautious about leaving their homes, and customers are spending more per visit as well. If Penn can deliver this performance while the pandemic is still raging on, it's a good sign for what lies ahead.
But importantly, Penn had to quickly adapt to changing conditions during the pandemic, and those efforts are paying off. To help counter COVID-19 headwinds, the company operated with a leaner staff, eliminated lower-margin services, and reduced marketing expenses.
The productivity enhancements helped increase net income to $199 million, up from $59 million in the same quarter in 2019. And similarly, it grew adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) 49% on a two-year basis.
The efficiency improvements are impressive enough that Penn achieved its highest trailing-12-month EBITDA margin in the last 10 years.
Expanding into a new market
Meanwhile, Penn is building out its digital sportsbook and iGaming business. The "other" segment that includes its online initiatives generated $98 million of revenue in the most recent quarter, up from $27 million in the year prior. In the second quarter, Penn was already live with a mobile sportsbook in four states with plans to add five more by the start of the 2021 NFL season. Management expects to be live in ten states by the end of the year, more than doubling the footprint it boasted at the start of the year.
To help speed up its expansion, the company announced its $2 billion acquisition of Score Media and Gaming (SCR) on Aug. 5. Penn will leverage Score's sports content and sportsbook technology to lower customer acquisition costs, expand its reach, and open up opportunities in new markets. Long term, Penn estimates the acquisition could increase annual revenue by $900 million and adjusted EBITA by $500 million while improving margins by at least 500 basis points.
The potential for the digital sportsbook and iCasino market is huge, a $30 billion addressable market in North America based on company estimates. The purchase of Score should help Penn establish a leading position in the industry.
Penn National Gaming is less exposed to business travelers
Notably, one of the lasting effects of the coronavirus pandemic has also been a decrease in business travel. The proliferation of remote work and remote meetings makes the idea of getting on an airplane to attend a business meeting or conference less cost-effective. Why shoulder the cost of airfare and travel when you can save a ton of money doing it virtually? Indeed, Delta Airlines CEO Ed Bastian believes only 70% of pre-pandemic business travel will return by 2023.
That trend might hurt the Las Vegas casinos -- formerly the home of many conferences -- as the lack of business travel would mean fewer rooms occupied, lower food and beverage sales, and of course, lower gaming revenue. But Penn National Gaming is not exposed to that risk, because it focuses on regional casinos and its fast-growing digital ecosystem.
Penn National Gaming's stock is not expensive
Penn National Gaming is trading at a price-to-earnings ratio of 27, well below the broad market average. The stock is down almost 15% year to date despite its rapid recovery.
Long-term investors looking for stocks that can benefit from the economic reopening should undoubtedly get to know Penn National Gaming.