Penn National Gaming Potentially Potent Pick Among Regional Gaming Equities, Says J.P. Morgan

Posted on: December 10, 2019, 08:53h. 

Last updated on: December 10, 2019, 09:17h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Up almost 14 percent since the start of the fourth quarter, Penn National Gaming (NASDAQ:PENN) is proving resurgent among regional gaming equities, a theme some analysts believe could be durable.

In a note to clients Tuesday, J.P. Morgan analyst Joseph Greff reiterated an “overweight” rating on shares of Penn while boosting his price target on the stock to $29. That’s eight percent above the Wall Street consensus of $26.85 and about 23 percent higher than Monday’s close around $23.

We continue to believe PENN offers a favorable risk/reward with an attractive valuation,” said Greff in the note.

Penn National, the operator of gaming properties under the Argosy and Hollywood brands, among others, has gained acclaimed this year in the Wall Street community due in part to the company’s exposure to the fast-growing US sports betting market.

In addition to its footprint in its home state of Pennsylvania, one of the top domestic sports betting markets, the company operates properties in other legal sports wagering states, such as Iowa and Nevada. Penn National is positioned to take advantage of sports betting proliferation in the US, as the company is the largest gaming operator in Illinois, where sports betting is expected to launch next year. Penn also enjoys dominant market share in states that could soon approve sports wagering, such as Michigan, Missouri and Ohio.

Other Catalysts

Wall Street’s recent enthusiasm for the stock has been driven in large part by management’s plans to shore up the balance sheet, an effort that could include the sale of the Tropicana on the Las Vegas Strip.

Our favorable view reflects a potential deleveraging catalysts via a sale of Trop LV/PSG, and an attractive valuation at lease-adjusted 6.9x 2020E enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA) and 16% free cash flow yield,” said Greff.

In a recent statement highlighting management changes, Jay Snowden, who takes the helm as Penn National chief executive officer on Jan. 1, said “we intend to meaningfully deleverage our balance sheet,” but no mention of selling the Tropicana was made.

Stock Has Supporters

Data confirms some professional investors are buying into the Penn National story. At the end of the third quarter, 23 hedge funds held long positions in the regional gaming company’s shares, a 15 percent jump from the previous quarter. HG Vora, which has stakes in a slew of gaming companies, is the largest hedge fund owner of Penn National shares, with a stake valued at more than $140 million.

Solid fundamentals and the potential for robust margin expansion could be among the factors luring pros to the stock.

Penn could benefit from “strong fundamentals for the regional gaming consumer, which should continue to support modest gross gaming revenue (GGR) growth, favorable year-over-year comparisons, particularly in areas impacted by adverse weather in 2019 (Midwest and South); and opportunity for further margin expansion,” said J.P. Morgan’s Greff.

Of the 14 analysts covering Penn stock, 11 have bullish ratings on the shares.