Penn National Gaming (PENN) has a Barstool edge This isn’t […]
5 Reasons Penn National Gaming is Playing with a Full Deck
May 27, 2022
| A rare opportunity is unfolding. Growth prospects are high, and the valuation is low for a name that’s been on our radar for quite some time. It may be time to double down on Penn National Gaming (PENN). Let me set the table for you. As the casino industry recovers from the pandemic, some operators are growing faster than others. PENN’s rejuvenated brick-and-mortar footprint and emerging digital presence have the company in a great position to increase profits and outperform. As Kenny Rogers sang in ‘The Gambler’, “You’ve got to know when to hold ‘em, know when to fold ‘em”. Well, we added PENN to our Tactical Model last summer. Admittedly, the stock hasn’t done well since. But based on the data we’re seeing, this is no time to fold ‘em! Penn National Gaming is still well worth the gamble for the following reasons: 1. Demand Growth is Forward-Looking…and yet to be Realized in the Stock Price When Penn National provided its first-quarter update, we knew we had a good bet on our hands. That’s because the prevailing uptrend in consumer demand that we’ve been tracking was confirmed by the results and commentary. Revenue jumped +23% to a record $1.56 billion—an incredible turnaround from the days of shuttered casinos and canceled sporting events. Management was borderline giddy in raising full-year revenue guidance from $6.23 billion to $6.35 billion at the midpoints. But won’t inflation hurt a discretionary industry like gambling? Based on Penn’s record sales and recent commentary from Draft Kings' CEO, the business appears rather inflation-proof. When you have a passionate, loyal customer base like casino and sports betting operators do, the product is akin to those of other “sin stocks” like alcohol or cigarette companies. Economic weakness has little effect on demand. LikeFolio’s proprietary measure of consumer demand (Purchase Intent mentions) began moving higher soon after the stock hit its March 2021 peak of $142. Like Moses parting the Red Sea, the divergence has accelerated in 2022. Check this out! |
| The rise in PI mentions is a combination of pent-up consumer demand for casino trips and the growing availability of legalized sports betting. Penn National checks both boxes in a big way. The company operates 44 casinos in 20 states in the Northeast, South, Midwest, and West. Most are under the popular Hollywood Casino brand. It also operates 24 retail sportsbooks and offers mobile sports betting in 13 states. Excluding Nevada, Penn National has captured an 18.6% share of the U.S. retail sportsbook market. This hybrid model allows PENN to capture both ends of the gambling funnel (digital and physical). And that’s a good thing because… 2. Casino Traffic is Back As the chart below shows, mentions of visiting, staying, or gambling at a casino are up 67% from last year. They are at their highest level since 2013! |
| Even better, the buzz is broad-based. PENN management noted that core customers are returning, and the younger customer demographic is growing. With Penn’s casinos hopping again, that means so too is its legacy database of more than 25 million casino players. The MyChoice loyalty program is forming deeper connections with this customer base. 350K people registered for MyChoice in Q1 gaining them access to casino rewards and lodging perks in conjunction with Choice Hotels. 3. Sports Betting is Hot According to the American Gaming Association, legal sports betting is live in 30 states plus D.C.—and legalized, but not yet up and running in an additional five states. Three more states including the massive California market have active legislation around in-person or mobile sports betting. So, with sports stadiums and arenas filling up again, the vibe is real. LikeFolio has been tracking consumer mentions of betting on sports events for the past decade. The buzz has reached its highest level since the pandemic began. And with legislative momentum behind it, it appears destined to climb to new highs. |
| We are further encouraged to see that the trend is consistent across all major sports. NBA, MLB, NHL, and Soccer betting mentions are each up 50% or more YoY. Plus, the NFL season is right around the corner and is sure to be a lucrative period for PENN. How are other OSB players doing? Purchase Intent mentions are also up at Draft Kings (DKNG) and FanDuel parent Flutter Entertainment (PDYPY). Ditto for horse racing specialist Churchill Downs (CHDN). But not up as much as PENN. Still, it’s good to see demand up among the peer group. Note that PENN has a 10-year strategic partnership with DKNG covering 5 states, so they’re competitors but are also running the same race. 4. PENN is Attracting a Younger Crowd In addition to the MyChoice program, Penn’s digital database is booming. Since its digital platforms went live, more than 1 million people have registered. Signups were up across all age segments in Q1. Where were they up most? That’s right. Digital signups were up 29% among 21- to 34-year-olds, the most of any age group. Penn’s data around drawing younger visitors is consistent with the buzz growth we are seeing on social media. Yes, social media is open to all. Aunt Carol keeps reminding us of her pending friend request. But it’s notoriously popular with the younger generations which we think are driving the chatter around PENN more so than penny slot lovin’ retirees. The sports betting crowd naturally seems to be on the younger side since they are growing up alongside this entertainment form. On March 17th when word broke that Brooklyn Nets superstar Kyrie Irving would miss most of his team’s remaining games, we were intrigued but not taken aback. The dude was hit or miss all season because of ever-changing vaccine mandates. Social media on the other hand was buzzing. More specifically, sports enthusiasts following Canada’s top sports betting app The Score went bonkers! Many felt the Nets right then and there became the dynasty that never was. Yes, Kyrie ultimately made it back for the playoffs. But blaming a lack of continuity, the team once favored to win it all was swept in the first found. Bettors were all over it. |
| What does this have to do with PENN? First, the Score was acquired by Penn National for $2 billion last year. Since its launch, it is Canada’s most downloaded sports betting app. Second, the tweet caused a spike in consumer mentions that ignited a lot of interest in the Score and Penn’s other online and onsite betting platforms. It’s been all uphill since. |
We think PENN’s fresh focus on 20- and 30-somethings is driving this buzz.
In reference to this newfound wave of younger customers, the CEO highlighted a plan to “reimagine our properties and offerings to enhance the entertainment appeal to this steadily growing segment of consumers.”
5. Barstool Sports Will Soon be Fully Owned
When Penn National formed a strategic partnership with Barstool Sports in February 2020, it gained a stake 36% of the business and access to 66 million sports nuts. Barstool agreed to exclusively promote Penn’s land-based and online casinos as well as its sports betting products.
The Barstool deal has been fired for PENN and is stimulating database growth.
In 1Q23, the put/call trigger date kicks in. This is when Penn will own the rest of Barstool—and a lot of value will be unlocked for the company and investors. Synergies will start to be fully realized.
In the meantime, the Barstool retail sportsbook will launch at six more properties in 2022 (pending regulatory approvals).
Barstool will also soon to be integrated with the Score app. This combined with the introduction of new features is expected to boost customer acquisition and growth across the U.S. and Canadian markets.
Leaving no stone unturned, Penn is also building out its Barstool-branded sports bars. It just opened a second location in Philly after opening its O.G. watering hole in Chicago. Both locations are reportedly seeing strong demand.
Expanding into live sporting events is also on the agenda. Barstool Sports provided an alternative commentary to the May 7th Canelo vs. Bivol boxing match in Las Vegas, a taste of its ambition in live events.
Penn National is taking a different approach to build out its digital ecosystem than peers and the results are showing. It is:
- Effectively identifying cross-sell opportunities across the ecosystem
- Investing in technology by building an in-house:
- State of the art media & betting platform, and an
- iCasino content studio
As part of this strategy, “3 C’s” technology (cordless, cashless, contactless) is being rolled out at more casinos. Driven by the mywallet app, the offering is gaining traction and expected to enhance efficiency, customer service, and marketing opportunities.
Bottom line: Most investors are calling it a night on PENN, but the action is getting good. We are staying at the tables.
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