Penn National Q4 Results Impressed, But Analyst Has Reservations

Time Stamp: February 6, 2022 5:52 PM

Posted on: February 6, 2022, 02:52h. 

Last updated on: February 6, 2022, 03:49h.

Shares of Penn National Gaming (NASDAQ:PENN) gained 1.79 percent last week. That’s after the regional casino giant posted fourth-quarter results that topped Wall Street estimates. But at least one analyst is taking a cautious approach to the downtrodden stock.

Penn National
Penn National Gaming and Barstool executives ring the Nasdaq bell in 2021. An analyst is cautious on the stock. (Image: TheStreet.com)

In a note to clients last Friday, Roth Capital analyst Edward Engel lowered his rating on Penn to “neutral” and his price target to $51, citing the potential for 2022 headwinds to emerge.

We downgrade PENN to Neutral, partially in response to 4Q21 results offering a less attractive 2022 outlook. While we remain bullish on PENN’s digital opportunity longer-term, we see several negative catalysts in 2022 that could erode confidence in its market share trajectory,” said the analyst.

When Penn delivered results for the last three months of 2021 last Thursday, the stock rallied after the operator said its digital gaming unit, including Barstool Sportsbook, performed better than expected. That enterprsise lost $6 million on revenue of $150 million in the October through December 2021 period, while analysts forecast a loss of $20 million on sales of $114 million. This year, Penn’s digital operations are expected to lose $50 million, well-below prior guidance calling for a loss of $80 million.

Devil’s in Guidance Details

Penn offered up 2022 guidance, saying it expects net revenue of $6.07 billion to $6.39 billion. That’s on earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of $1.85 billion to $1.95 billion.

That’s a decent outlook, and some analysts argue fears about faltering revenue and margin erosion are mostly factored into Penn’s stock price. But Engel notes it will be tricky to keep margins steady as inflation soars. He also mentions some potential market-specific issues Penn could encounter as 2022 unfolds.

“While easy 1Q comps offset a difficult 2Q, we see downside risks from incremental cannibalization at four properties next year (Bossier, Lake Charles, Council Bluffs and East Chicago),” adds the analyst.

Penn, the largest regional casino operator in the US, derives substantial portions of its revenue from Louisiana and the Midwest.

Cautious on Penn Canada Opportunity, Too

Last August, Penn doled out $2 billion in cash and equity to acquire Score Media and Gaming to gain a foothold in Canada, as that country legalized single-game sports wagering. Ontario, the country’s most populous province, is slated to open the market to private companies in April.

While that could be a positive for Penn, there are significant competitive threats in the forms of Bet365, Entain, and Flutter, which are already operating in Canada’s gray market.

“These operators can also rationalize greater marketing spend, given scale benefits from gray market operations in adjacent provinces,” notes Engel.

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