Is Penn National Gaming (PENN) undervalued?

Standing out among the Street's worst performers today is Penn National Gaming, a resorts & casinos company whose shares slumped -4.3% to a price of $30.8, 34.72% below its average analyst target price of $47.18. The average analyst rating for the stock is buy. PENN lagged the S&P 500 index by -3.5% so far today and by -21.3% over the last year, returning -39.2%.

PENN Entertainment, Inc., together with its subsidiaries, provides integrated entertainment, sports content, and casino gaming experiences in North America. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.

Penn National Gaming's trailing 12 month P/E ratio is 22.6, based on its trailing Eps of $1.36. The company has a forward P/E ratio of 16.4 according to its forward Eps of $1.88 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer cyclical sector has an average P/E ratio of 24.11, and the average for the S&P 500 is 15.97.

To better understand PENN’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Penn National Gaming’s PEG is 9.09, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Penn National Gaming's gross profit margin trends:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2021-12-31 5,905,000,000 2,967,800,000 49.74 4.06
2020-12-31 3,578,700,000 1,868,000,000 47.8 7.97
2019-12-31 5,301,400,000 2,954,500,000 44.27 1.49
2018-12-31 3,530,600,000 1,990,700,000 43.62 n/a
  • Average gross margin: 46.4 %
  • Average gross margin growth rate: 4.5 %
  • Coefficient of variability (lower numbers indicating more stability): 6.3 %

We can see from the above that Penn National Gaming's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Penn National Gaming was $652,000,000.00 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, PENN is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 86.6% and has on average been $406,825,000.00.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Penn national gaming's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.3, but is still below the average P/B ratio of the Consumer Cyclical sector, which stood at 3.11 as of the third quarter of 2022.

Since it has a lower P/E ratio than the sector average, a lower P/B ratio than the sector average, and an irregular stream of positive cash flows with an upwards trend, Penn National Gaming is likely undervalued at today's prices. The company has mixed growth indicators because of an inflated PEG ratio and consistently strong gross margins with a positive growth rate. We hope you enjoyed this overview of PENN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.