Penn National Gaming (NASDAQ:PENN) has been on a tear. The stock is up over 1,300% in the last year, and over 31% year-to-date. But with it down 6% in the past month, will its long-term run continue?
In the past, I wrote that PENN stock was deeply undervalued based on expected free cash flow. For example, on Oct. 27, when it was at $57.75, I wrote that the stock was worth $107. Today, on Mar. 18, almost five months later, PENN stock is up to $113.81, or 97% higher.
However, I am no longer as sanguine about its potential to spike like this again. But it could still have one more last call drink at the table, so to speak, if more states pile into sports gaming. In general, though, I believe that much of the upside in this regard is already priced into the stock.
Valuation Issues
One reason I say this is because the stock trades at an unusually high forward price-to-earnings (P/E) ratio. For example, right now analysts estimate that its earnings per share (EPS) in 2021 will be $1.50, according to Seeking Alpha. This gives it a forward P/E of 76 times 2021 EPS.
Even with an increase in EPS of 55% forecast for 2022, PENN stock is still at 49 times 2022 estimated earnings. That is a very high forward P/E multiple two years in the future.
Some analysts, such as this one at Seeking Alpha, believe that the hype in PENN stock is overdone due to the Barstools sport betting app. The author believes that at best, the Barstools will gain a minimal market share. It has to fight for attention and grab share from at least 20 other sports betting apps in the market already.
This is definitely a contrarian view. For example, this article in CNBC shows that James Cramer is still gung ho giddy on PENN stock. Barron’s wrote at the end of January that JPMorgan’s analyst, Joseph Greff, was now careful about valuation issues. He said that the regional gaming stocks should only be bought on pullbacks.
At the end of January, PENN stock was at $103.72, and subsequently spiked to over $136 as of March 15. Since then it has fallen to current levels and could keep falling. If one was to follow Mr. Greff’s advice, the stock should fall below $103 or so before investors should get back in.
What Other Analysts Say
TipRanks.com indicates that 14 analysts have an average price target of $119 on PENN stock, or 5% above today. However, Marketbeat.com says that 18 Wall Street analysts have a consensus target price of $94.16, or 15.9% below today’s price.
Seeking Alpha says that its survey shows an average price gain of 5.3% to 117.90, but Yahoo! Finance says that 11 analysts have an average target of $109.36. Confused? How can so many of these surveys show such disparities with a set number of analysts’ reports?
There probably is no easy answer. Analysts come out with updates on their target prices daily, and so, depending on the price action they can reverse themselves. In addition, it depends on when the survey reports come out for their average number to post.
As it stands now, the average of these four price target analyst surveys is $110.10. That is just a little below where PENN is today.
The key point is that on average these analysts are not especially ebullient on PENN stock like they used to be. That should also be another note of caution for potential investors in the stock.
What To Do With PENN Stock
I think the best advice is to follow what the JP Morgan analyst said — wait for a pullback. The defensive investor, although aware that the company may come into substantial cash flow from sports betting, will wait. There could very well be an opportunity to get back in the stock with a substantial margin of safety.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.