Penn National Casino Spending Resilient, Digital Premium Gone, Says Analyst

Posted on: June 10, 2022, 02:18h. 

Last updated on: June 10, 2022, 02:28h.

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

Penn National Gaming’s (NASDAQ:PENN) land-based casinos remain sturdy. But investors are no longer assigning a premium to the operator’s digital business, which includes Barstool Sportsbook.

Penn National
Penn National’s Ameristar Casino in Colorado. An analyst is bullish on the stock. (Image: FlyerTalk)

However, resilient spending among patrons frequenting regional casinos isn’t satisfying market participants, as highlighted by Penn’s 40% year-to-date decline. In a new note to clients, Stifel analyst Steven Wieczynski points out investors have “almost completely written off” Penn amid dour economic expectations.

At this point, we believe investors are pricing in not only a meaningful slowdown in the regional gaming consumer, but also effectively zero credit for their Interactive business,” said Wieczynski.

Like other casino stocks, Penn is a travel and leisure equity, placing it in the consumer discretionary sector. That’s one of the worst-performing groups this year. But as Wieczynski notes, Penn’s regional casino business may be a baby being thrown out with the bath water, as investors sour on consumer cyclical equities.

Penn Reality Different than Investor Perception

Penn is the largest regional casino operator, meaning it’s not impervious to inflationary pressures. Still, the reality of what’s happening at the company’s brick-and-mortar casinos and what investors believe is taking place are two different things.

In meetings with Wieczynski, Penn management said the regional casino customer remains healthy, and the operator has catalysts for its land-based business, as more patrons in the 65-and-up demographic return to the venues.

“Management has seen zero signs the regional gaming consumer is pulling back in light of rising gas prices and other inflationary pressures,” says the Stifel analyst. “This was a theme we heard across our regional and Strip operator meetings, but one worth highlighting ,as investors continue to look for the elusive signs of consumer ‘pullback’ in our space.”

Additionally, Penn is less dependent on lower-margin players than it has been in the past — a relevant point against the backdrop of a possible recession, because those are the customers that will swiftly eliminate casino spending in tough economic environments.

Potential Penn Perks

Amid high inflation and the specter that the Federal Reserve could raise interest rates by as much as 75 basis points at its next meeting, gaming equities are being taken to task. However, in the case of Penn, earnings are rising while valuation is declining – a potential positive.

Regarding the regional casino behemoth, it has its own set of catalysts that market participants may not be fully appreciating. Those include a more rational approach to marketing spending today than during the 2008-09 economic crisis.

“Third, management noted visitation from the high-worth 65+ demographic is still off double-digits versus 2019. Fourth, the majority of PENN’s database lives within a 20-minute drive from the property, mitigating the risk from rising gas prices,” concludes Wieczynski.

He rates Penn a “buy” with a $50 price target.