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Penn National analysts rush to defend stocks as decline intensifies

Published: May 7, 2021, 07: 02 hrs.

Last updated: May 7, 2021, 18: 14 hrs.

Todd Shriber

Penn National Gaming (NASDAQ: PENN) reported better-than-expected first-quarter earnings on Thursday, but shares fell more than eight percent.

Penn stock
Hollywood Casino at Penn National Race Course in Grantville, Pennsylvania. Analysts defend Penn National Gaming amid weakness in the stock. (Photo: PennLive.com )

That's an extension of a now-long slide that sees the regional casino operator up 18 percent over the past month and 41 percent from its March highs. Today, analysts are lining up to defend Penn stock, with some saying the sell-off is too big, too fast and could prove to be a buying opportunity.

Thomas Allen of Morgan Stanley said Penn's slide is "exaggerated" after what he calls a "strong" first-quarter result. He reiterates an "equal weight" rating on the stock with a $ 99 price target, up nearly 18 percent since the May 6 close.

In the first three months of the year, the gaming company earned 55 cents a share on revenue of $1. 27 billion. Analysts had expected earnings per share of 28 cents on sales of $1. 14 billion. E earnings before interest, taxes, depreciation, amortization and restructuring costs or rent ( EBITDAR) for the January-March period was 447 million, easily beating the consensus estimate of 393. 9 million.

Encouraging land trends for Penn stock

During the rally and subsequent entry into the S&P 500, Penn was revered for its nascent iGaming and sports betting. But it remains the largest regional casino operator in the country.

The trends on that front are encouraging. But yesterday's stock sell-off may have been a case of investors pricing in the effects of COVID - 19, which hampered the company's first-quarter results in Illinois and Pennsylvania, where gambling outlets were closed for part of January. What's more, Penn's Zia Park in New Mexico didn't reopen until early March. Still, analysts like what they see.

Pent-up demand from brick-and-mortar customers is impressive and has yet to be fully implemented across the PENN portfolio, "said Steven Wieczynski of Stifel in a note to clients. "Performance in the less restrictive Southern segment has outpaced the broader PENN portfolio and bodes well for states that have yet to ease casino restrictions to the same degree."

Wieczynski still rates Penn a "buy" but has lowered his price forecast to 108 from $ 124 to reflect a more conservative stance on the company's online casino exposure and Barstool Sportsbook. The operator wants the mobile betting app to be operational in eight states by the start of the NFL season and 10 by the end of 2021.

Maintenance costs Check

As is the case with many regional gaming operators, Penn is proving itself to be a margin expansion against COVID - 19 curtains. The company estimates long-term margin expansion will approach 90 percent of 2019 revenue.

Cost management is another argument for Pen Resources, Wieczynski notes.

" PENN's customer acquisition costs are well below market rates, while the benefits of customer retention are likely underestimated at this stage of the game, "said analyst Stifel. "PENN noted that their blended CPA is below $ 100 / client , which compares to peers using $ 300 to $ 800 at this time."

While investors may be worried, the analyst says he is confident that Penn's management can run the business leaner even as demand trends return to pre-pandemic form.

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