Penn National Capitalizing on Hot Stock with Secondary Offering, Investors Balk

Posted on: September 24, 2020, 09:27h. 

Last updated on: September 24, 2020, 10:52h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Penn National Gaming (NASDAQ:PENN) slumped Thursday after the company said it’s selling 14 million shares of equity. It’s a move that will raise capital, but also dilute current investors. On the news, the stock is lower by more than three percent in midday trading.

Hollywood Casino
Slots players at Penn National’s Hollywood Casino in Toledo, Ohio. Penn stock slid today on news of a secondary offering and an analyst downgrade. (Image: Toledo Blade)

Underwriters of the transaction also have a 30-day window in which they can purchase an additional 2.1 million shares, according to a statement issued by the casino operator.

Assuming Penn sells 16.1 million shares, it’d raise $1.11 billion, based on Wednesday’s close of $69. In the aforementioned statement, the company doesn’t say at what price the new shares will be sold. But secondary offerings are usually marketed at prices below current market value. Hence, stocks frequently decline on the news.

Penn is continuing a trend of gaming companies capitalizing on resurgent equity to raise capital via secondary sales. As stocks rallied off the March lows, casino and sportsbook operators sold billions worth of new equity to bolster balance sheets. Penn previously tapped capital markets in May when it sold $500 million worth of bonds and equity.

At the end of the second quarter, the gaming company had $1.2 billion in cash and $1.8 billion in debt.

More Thursday Trouble

Contributing to Penn’s trouble today is a rare analyst downgrade. Macquarie analyst Chad Beynon lowered his rating on the gaming outfit to “neutral” from “outperform,” citing “stretched valuation,” among other reasons.

Beynon also pointed to high leverage, fixed costs Penn faces in the form of property leases, and the likelihood of an “arms race” when it comes to marketing costs, as the company ramps up competition against rivals such as DraftKings and FanDuel. Still, the analyst boosted his price target on Penn stock to $66, up from $56.

Following earlier life-rafting events in 1Q, PENN made strategic moves (Trop LV trade for rent credits, equity/debt raise, cost cutting) to shore up the balance sheet for 2020. Investors became increasingly more comfortable with the core business, while beginning to recognize the Barstool value to the PENN brand,” said Beynon in a note to clients.

He’s the second analyst in a month to downgrade Penn on valuation concerns. However, most of the sell-side community is wildly enthusiastic about the name, with some forecasting moves to $80 or $85.

Barstool Sportsbook Update

Penn’s Barstool Sportsbook mobile app went live across Pennsylvania last weekend, providing Wall Street with another source of excitement.

In a filing with the Securities and Exchange Commission (SEC) today, the company said the sports betting app was downloaded 30,000 times last weekend in the Keystone State and 35,000 times during a three-day soft launch.

Penn said in the filing that the app procured 24,000 registrations in its home state, 12,000 of which were first-time depositors. Those gamblers plunked down an average of $243 to open Barstool Sportsbook accounts, driving a first-weekend handle of $11 million.

Overall, the app was downloaded 180,000 times across the country last weekend, the highest mark of any sport-related app during that period, according to the company.