Penn National Gaming (PENN) is undervalued

Penn National Gaming (PENN) owns and manages several gaming and racing properties, retail sports betting operations, online sports betting operations, and video gaming terminal (VGT) operations.

In February of 2020, Penn National purchased a 36% equity interest in “Barstool Sports Inc.” which is a leading digital sports, entertainment, media, and lifestyle brand. Barstool sports is very popular among the younger demographics and expands Penn’s total market and target demographics. Barstool and Penn entered into an agreement where Barstool will promote Penn’s sportsbook, and iGaming products through the “Barstool Sportsbook” mobile app.

Penn National Gaming looks to continue expanding and evolving their operations in order to become an omni-channel provider of retail/online gaming, and sports betting.

Investment Thesis:

· With more and more states passing legislation, and making sports betting legal, there is a big opportunity for sports betting and gambling stocks to take advantage of.

o The companies who move the quickest will enjoy a first mover advantage and capture large
amounts of market share.

· With a large variety of sports betting and gambling stocks in the market, which one is best positioned for large growth, and to become a leader in the National market?

o I believe that this is Penn for many reasons, which will be discussed throughout this analysis.

· $PENN – Penn National Gaming is expanding rapidly and has plans to continue their expansion in the American gaming space. Furthermore, they have numerous macroeconomic factors that they can take advantage of to accelerate their growth.

Investment Information:

Macroeconomic Outlook:

Sports Betting:

Since 1992, the Professional and Amateur Sports Protection Act (PASPA) made competitive sports betting illegal in most states. However, in 2018, the PASPA was overturned by the Supreme Court and all states are now allowed to legalize sports betting.

Some states have already passed legislation and have made sports betting egal (and live). These states include Oregon, Nevada, North Dakota, Montana, Colorado, New Mexico, Iowa, Illinois, Indiana, Michigan, Arkansas, Mississippi, Tennessee, North Carolina, West Virginia, Virginia, New York, Pennsylvania, Delaware, Rhode Island, and New Hampshire.

Additionally, there are some states that have made sports betting legal, however, sports betting operations are not yet live in their state. These states include Washington, Arizona, Wyoming, South Dakota, Nebraska, Wisconsin, Louisiana, Florida, Maryland, and Connecticut.

Lastly, there are some stated that are in the legislative process of making sports betting legal. These states include Ohio, and Massachusetts.

All of the other states are yet to make a move to legalize sports betting.

The full legalization of sports betting in the 22 aforementioned states have opened new business and expansion opportunities for companies that operate in the gaming space. The companies who integrate into these states, and has the best User Experience, Customer Service, and reach, will be able to take over these states and enjoy a first mover advantage that could benefit them for years, decades, or even centuries.

Furthermore, the state who have legalized sports betting, but are yet to have active sports betting operations also represent a large business/expansion opportunity. These states will not have as much competition out of the gate (as the states that have already fully legalized sports betting). This should help sports betting companies to gain market share quickly and enjoy the first mover advantage.

As a result of the large interest/legalization of sports betting, a research study conducted by Gabelli Securities (in partnership with the US Census Bureau) estimated that the US sports betting industry will grow to $10.1B by 2028, which assumes a CAGR of over 25% (currently the sports betting industry is valued at $2.1B).

The Barstool Sportsbook was created to take advantage of the legalization of sports betting and the large business opportunity that comes with it. Currently, the Barstool Sportsbook is available in Pennsylvania, Michigan, Illinois, Colorado, and Indiana.

Furthermore, the Barstool sportsbook is looking to launch in Virginia (in the next couple of weeks), Arizona (Fall 2023), Maryland (Fall 2023), and maybe even Canada (in 2023, which will be talked about later).

Retail/Online Gaming:

The COVID-19 pandemic had two large impacts on the US gambling market. Firstly, the retail gambling market in America suffered due to the pandemic, as many states restricted the use of casino’s due to the lockdown measured that they put in place to fight the COVID-19 pandemic. This was catastrophic to many retail casinos and unfortunately caused some of them to close their doors permanently. Conversely, the COVID-19 pandemic helped out the online gaming industry greatly. This was due to people converting from retail casinos to online casinos due to the closure of the retail casinos.

However, with many lockdown measures being lifted and many retail casinos re-opening their doors, how will the US retail and online gaming industry perform over the next couple of years?

Some reports are estimating the industry to grow at a CAGR of 17.3% over the next 5 years. This is due to their belief that people will go back to the casinos and revive the retail industry, while the online gaming industry continues to grow.


Barstool Sports:

In February of 2020, Penn National Gaming closed their acquisition of “Barstool Sports”. Penn initially acquired 36% of Barstool for $161.2M and has committed to purchasing an additional 14% of their business for $62M over the next 3 years. The deal would conclude with Penn National Gaming owning 50% of Barstool in Feb 2023 for the purchase price of $223.2M, valuing Barstool at $446.4M.

Part of this acquisition included an exclusive partnership between Barstool Sports and Penn National gaming for up to 40 years. This partnership also allows Penn National to use the Barstool Sports brand to promote their online and retail sports betting, and iGaming products.

In September of 2020 (7 months after the acquisitions) Penn National, in partnership with Barstool Sports, launched the “Barstool Sportsbook” which is a sports betting app that uses the Barstool Sports name, and targets their demographic. The Barstool Sportsbook launched in Pennsylvania in Sept 2023 and has expanded to Michigan in January 2023.

Penn National Gaming believes that their partnership/acquisition of Barstool Sports reflects their strategy of evolution/expansions, to help them meet their goal of becoming the Nations largest gaming operator and omni-channel gaming and betting provider.

The Score:

Recently (Aug 5th 2023), Penn National Gaming acquired “Score Media and Gaming”, which is a leading digital media and sports betting technology company. Penn National Gaming acquired 100% of Score, In return for $2B.

This acquisition proves Penn National Gaming’s desire to become the largest player in the industry in a big way, as they have set their sights on an international expansion into Canada. Penn has noted the significant opportunity that Ontario brings to the table and believes that their acquisition can help them to penetrate the Ontarian gaming industry. Ontario would be the 5th largest jurisdiction for gaming in all of North America and contributes largely to the $4+B opportunity that Canada has to offer.

Penn National highlights the ability for Score to seamlessly connect Penn’s sports content and betting operations and help to monetize their highly engaged user base. Penn believes that integrating the Score’s data, analytics, tracking, odds, betting, and content will help them to improve margins. Lastly, Penn National Gaming has an optimistic long-term outlook on the impact that the Score will bring, estimating long-term revenues from this acquisition to reach $900M annually.

Many people have also speculated that the Barstool Sportsbook will be able to integrate into Canadian provinces and territories through this acquisition. If this is Penn’s plan, it shows their level of thought behind their acquisitions, and their exceptional talent for finding synergetic acquisitions.

Financial Information:

· Financial Performance (Good): Penn received a tax benefit of $165M, they experienced a $29.2M gain on disposing their assets, their depreciation expense fell by 11.5%, and they increased their cash position by 323.8%.

· Financial Performance (Bad): Over the course of 2020, Penn’s total revenues fell by 32.5%, they experienced a net loss of $670M, their adjusted EBITDA fell by 45.5%, and their operating expenses only decreased by 15.6% (far less than the decrease in revenues).

· Stock-Based Compensation Arrangements: In 2020, Penn National issued 4,475,908 common shares as part of their compensation plans. These shares had a dilutionary effect of 3.86% on the previously existing shares.

· Common Stock Offerings: In 2020, Penn National offered 35,266,667 common shares to the market as a common stock offering. These shares were offered in order to help Penn National to grow and launch their “Barstool Sportsbook” sports betting application. These shares had a dilutionary effect of 30.4%.

· Barstool Sports Preferred Stock: In 2020, Penn National gave Barstool 883 preferred shares, which had a value of $23.1M at the time of the offering. Each of the Series D preferred stocks that Barstool received is redeemable for 1,000 common shares. These preferred shares are convertible according to a 4-year conversion plan. In total, Barstool will be receiving 883,000 shares over 4 years, equalling 220,750 common shares/year. This would have a yearly dilutionary effect of roughly 0.2%.


$BYD – Boyd Gaming Corp: Boyd Gaming is one of the largest casino entertainment companies in the USA, operating over 28 gaming properties over 10 different states. Boyd Gaming prides themselves on offering outstanding entertainment experiences and customer service to all of their guests. Boyd plan to pursue opportunities for growth in their business.

$BALY – Bally’s Corp: Bally’s Corp. owns and operates gaming and racing facilities across the USA. As of 2023, Bally’s owns 13,308 slot machines, 460 game tables, and 3,342 hotel rooms, across their 12 different casino locations. Furthermore, Bally’s owns horse racetracks across 8 states.

$MGM – MGM Resorts International: MGM Resorts International owns and operates casino, hotel, and entertainment resorts across the USA (and Macau). MGM offers gaming, hotel, convention, dining, entertainment, and retail services across their various resorts. Furthermore, MGM offers sports betting and iGaming through their BetMGM platform.

$CHDN – Churchill Down’s Inc: Churchill Downs operates as a racing, online betting, and gaming entertainment company in the USA. Churchill downs has a sportsbook for sports betting, and an iGaming platform that are available to their customers in 8 states.

Valuation Information:


I was able to find Penn’s WACC through my own WACC models. By inputting the necessary information, I found Penn’s WACC to be 8.87%.

CAGR (2021-2025):

I was able to find the forecasted CAGR over the next 5 years to be 29%. I did this through looking Penn’s forecasted financial performances from analysts, and by looking at Penn’s previous financial performances.

CAGR (2030):

Penn simply cannot grow by 29% yearly forever as a result I estimated their CAGR in 2030 to be 5% (which is rather low). I then tapered Penn’s growth by deducting 5 percentage points off of the CAGR yearly until 2029.

Perpetual Growth (Risk Free Rate):

I was able to find Penn’s Risk-Free Rate in their SEC 10-K filing, in which they estimated this figure to be 1.55%. This 1.55% was used to forecast their yearly growth after 2030.

Operating Expense Increase Rate:

I was able to find Penn’s operating expense increase rate to be 20% through taking the average growth rate of their operating expense over the past 5 years.

Interest Expense Increase Rate:

I was able to find Penn’s interest expense increase rate to be 4.5% by taking their average growth rate over the past 5 years.

Depreciation and Amortization Increase Rate:

I was able to find Penn’s depreciation and amortization increase rate to be 6.5% by taking their average growth rate over the past 5 years.

Tax Rate:

I was able to find Penn’s 2020 effective tax rate in their SEC 10-K filing. In 2020, Penn’s tax rate was 19.8%, I used this 19.8% for their tax rate through 2030.

Capital Expenditures (CAPEX) Growth Rate:

I was able to find the CAPEX increase rate to be 9% through taking Penn’s CAPEX growth rate over the past 5 years.

Investment Valuation:


I was able to undergo my DCF model by using the information found above in the “valuation information” section of this report. By incorporating this information, I was able to find Penn’s fair value to be $199/share, which implies an upside to this investment of 190%. This valuation is rather high, so I decided to also undergo 3 comparable analyses to see if this valuation persisted.

Comparable Analyses:


By comparing Penn’s P/B ratio to their competitors (found above in the “competition” section of this report), I found Penn’s fair value to be $134/share, which implies an upside of 95%. This valuation is not quite as high, but still indicates that Penn is very undervalued.


By comparing Penn’s EV/Revenue multiple to their competitors, I found Penn’s fair value to be $83.06/share, which implies an upside of 21%. This estimate is by far the lowest that I have had thus far, however it still indicates that Penn is undervalued.


By comparing Penn’s EV/EBITDA multiple to that of their competitors, I found Penn’s fair value to be $90/share, which implies an upside of 32%. This valuation also indicates that Penn is undervalued.

Average Comparable:

I took the average result from the 3 comparable analyses that I underwent. I did this because the results were scattered, and I wanted one clear valuation based off of the comparable analyses. I took a weighted average weighing the P/B comparable at 20% weight, and the EV/Revenue & EV/EBITDA comparable analyses at 40% weight. By doing this I arrived at a final comparable valuation of $96/share, which implies an upside of 40%.


My plan for an investment into $PENN – Penn National Gaming, would look something like this.

· Enter into a position into Penn below $70/share

· Sell 50% of my position when $PENN hits $96/share (comparable valuation)

· Sell the remaining 50% when $PENN reaches $148/share (average total valuation)


· Financial Performance: In 2020, Penn did not have a good financial performance. Tis is de in large part to the effects that the COVID-19 pandemic had on their retail operations. Furthermore, during this time they also acquired Barstool, which also had a negative impact on their overall financial performance. If Penn is not able to bounce back in 2023, despite states re-opening, then investors may start to get worried and liquidate their positions.

· Share Dilution: In 2020, Penn suffered from a large amount of share dilution. This was due to their Barstool acquisition, and their share offerings so that they could launch products under the Barstool brand. This dilution is not worrying, as long as this level of dilution is a one-time occurrence, this is because they were using the funds received from the offering to fund projects that would help them to expand and generate more revenues in the future. However, if this level of dilution continues, I would be very worried for the future of their stock price.


· Financial Performance: Penn’s 202 financial performance was very poor. However, if they are able to bounce back in 2023, they will be able to spark a new sense of hope/optimism in their investors and prove to investors that they are financially healthy. Their earnings report this year are very important to their share price and are something to keep an eye on as an investor.

· Acquisitions: Historically, when Penn has acquired companies, their stock price has benefited from the news of the acquisition breaking. This is true when Penn acquired the score, as their share price went up 10% the following trading day. This was also true when Penn acquired Barstool Sports, as their stock price increased by over 10% the following trading day. Penn has stated that they are committed to continuing their growth, so future acquisition may be on the cards, and should help boost the Penn stock.

· Legalization of Sports Betting: As more states break the news that they are fully legalizing sports betting and starting operations, or if they are passing legislation to make sports betting legal, Penn will benefit from this news. This is especially true if they announce that they will be expanding their operations to that/those state(s).

This article was written by u/Lost-Guarantee229.