“Giddy investors,” in the words of gaming stock advisor Howard Klein, are missing the point with headlong investments in Penn National Gaming shares based on its online business, primarily sports betting.
Klein shared that opinion at Seeking Alpha on Sunday. His post sounded deeply contrarian compared to most analysts, especially those on a congratulatory Q4 earnings call just days before.
$Penn hit a record share price Friday
And, especially contrarian given the stock hit nearly $129 a share Friday just after trading hours closed.
Morning Bell with Jim Cramer, for instance, began Monday with this:
“I remain a gigantic believer in Penn National. It is the most expensive gaming company.”
But just about the same time on Monday morning, $PENN stock price dropped back more in touch with post-Super Bowl reality, down to below $117 a share, eventually settling in around $121 at the close.
Klein’s deep look at the core of PENN
Klein has long run his own subscription gaming stock consulting firm called The House Edge. And he has provided one of the most in-depth analyses of Penn National stock around.
Klein’s primary point can be summarized as:
Instead of focusing on the online app developed with Barstool Sports branding, investors should instead pay attention to Penn’s core. And that means don’t focus so single-mindedly on the online segment of its business – primarily the Barstool sports betting app.
Klein’s key point list, in his own words, reminds us:
- “Penn’s core strength lies in its 41 properties in 20 states. But investors have bid up the stock on a sports betting dreamscape, a nice but crowded low-profit segment.”
- “Management expects its 10-state sports betting focus to form its ultimate base. Bigger competitors will have a much bigger base.”
Klein believes the entire online sports sector is “mispriced”
And he called the PENN stock price run a “bubble-like valuation,” especially when considered against main competitors from the online sports betting space. Klein called the entire sector “mispriced” and a “field of unicorns.”
He also pointed out that neither management nor institutional analysts on the PENN earnings call spoke of the company’s lack of profitability or its physical properties.
For context, Klein pointed out Flutter (PDYPY), which includes Paddy Power, Betfair, Pokerstars, Sky Bet, Sportsbet, FOX Bet, FanDuel, TVG and Adjarabet, has a market valuation of $38.31 billion, while Penn’s valuation is $29.36 billion.
Yet, PDYPY does not command a higher price than PENN. On the London exchange, Flutter ended the trading day Monday at around $98.50.
Klein likes PENN’s core business at more than 40 regional properties
All that said, Klein went on to deeply praise Penn for how it managed its core businesses during the pandemic.
He then came back with a deeply cautionary take on its online business over the next two years.
“It is the future of the Penn casino business post-pandemic that to us, holds the most pregnant promise for a healthy growth arc. It might even someday earn the lofty valuation it now enjoys on real-world results. Perhaps in two years, it might hit $100 for a solidly founded set of performances.
“We are singularly unimpressed overall with Penn’s early Barstool sports betting performance. It has a long way to go. It needs to prove it can break through a powerhouse set of sector leaders based entirely on its stoolie nation.
“As a result, we think there is a case to be made for shorting Penn, we think the dizzying climb is presently lubricated by far too many gaga analyst calls and bubble expectations as to the growth arc of sports betting. Mr. Market is still buying into the Penn dreamscape so a short now might produce some skittish nights. I don’t see shorting at the moment against what I believe is the hot breath of the Super Bowl results I expect to produce lots of heavy breathing among some analysts.”
He ended with this final takeaway:
“Buy Penn for its casino business. Consider its Barstool sports betting position a nice plus that will do fine. But to value the stock largely on sports betting now, isn’t the best way to come to a buy-sell or hold decision.”
Lead image credit: AP Photo/John Locher