• Brett Schafer

Not So Deep Dive: Penn National Gaming Stock



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Show Notes


(Ryan) What they do: Penn National is an omni-channel provider of gaming (retail & online), live racing, and sports betting entertainment. It’s a bit difficult to describe the full extent of their operations in a concise manner because they have so many different initiatives, but I’ll try to focus on the most important stuff. So Penn National operates (according to their last 10-k) 41 physical properties across 19 states. These physical properties include casinos, casino/hotels, racetracks, etc., all which generate 2 types of revenue (gaming revenue & food, beverage, hotel, and other). But most of the revenue comes from gaming, and of that gaming revenue (85% in the last nine months) came from slot machines.


However, Penn has also diversified a lot in the last year. Penn acquired a 36% stake in Barstool Sports, and bought out the brand TheScore for $2 billion. Both those companies generate advertising revenue.


Last part before moving on to the history. They’ve made a recent push into what it calls its interactive segment. This includes retail sports betting so in-person, online sports betting, online social casinos (lets people play for free), and real online casinos. I believe this is where most people likely think the majority of growth will come from.


(Ryan) History: Penn National’s history was really rooted in horse racing. They were founded in the early 1970’s, when a group of community leaders from central Pennsylvania decided to build a thoroughbred racing track. They expanded from one racetrack to many, and they began to allow people to bet via phone and they even had a TV channel called ‘Racing Alive’. Eventually, they also built out off-track wagering sites, which spurred even more bettors.


It wasn’t until the late 1990’s that they moved away from a pure parimutuel system and instead to a diversified gaming company. They began installing slot machines at some of their properties and that led to the push into full-blown casinos. Today, they have casinos, racetracks, sportsbooks, hotels, bars, and in some locations a blend of all of them. Penn is also a serial acquirer. They buy a ton of companies and in some cases interests in companies.


And Penn came public in 1994, when it was only a racing company. But they’ve done some follow-on offerings, most notably last year, when they raised ~$1 billion from issuing common-stock.


(Brett) Industry/Landscape/Competition:

  • Commercial gambling hit a record $44 billion in spending in 2021 in U.S.

  • Sports Betting is a dynamic market, and I am getting a ton of sources saying different annual spending numbers. Statista says $2.1 billion in 2021 that is going to grow to $10.1 billion in 2028 (but who knows)

  • NA iCasino market is expected to be $20 billion by 2026 (seems like a reasonable estimate)

  • Competitors: MGM, FanDuel, Wynn, Caesars, Las Vegas Sands, Draft Kings, and many others. MyScore and Barstool compete more in the sports media space.


(Ian) Management and Ownership:

  • Jay Snowden is the CEO

  • He joined Penn National in 2011 as a senior vice president

  • Became Chief Operating Officer in 2014

  • Became CEO in January of 2020

  • Previously he worked in a variety of roles for Caesar’s, so he’s been around this world for years prior to PENN

  • There has been a bit of turnover in the executive office. Former CFO who started with Jay Snowden left after less than a year, cited stress of possible relocation during covid

  • Previous CFO cited family issues when he did not renew his contract.

  • About 1.7% insider ownership. Most of that is owned by the chairman emeritus

  • Dave Portnoy is the founder of Barstool and associated with the brand. I don’t want to get into all of the controversy around Portnoy, but if you are interested in this stock, he is part of the story.


(Brett) Valuation:

  • Market cap of $8.46 billion, ticker PENN

  • EV of $9.4 billion, $13.4 billion if you include financing obligations, $17.9 billion if you include lease liabilities

  • I would include financing obligations but not lease liabilities

  • EV/FCF of 17, but this number they gave us is likely just OCF - capex and this is a business structure where you need to look at the investing and financing part of the cash flow statements

  • Dilution has been hot and heavy because of acquisitions and capital raises. Want to watch growth in rev/s wit this one


(Ryan) Earnings: Riddled with adjustments

  • Revenue for the last 12 months was $5.9B. That’s up substantially from last year, but up only about 11% from its 2019 numbers.

  • Now they don’t report their cash flow statement on the earnings, which is unfortunate. But they had about $420M in net income for the year.

  • They said in their CC that they generated $800M in FCF for the year, which would equate to about a 14% FCF margin. But I can’t tell how they calculate that

Other things they report (take what you will):

  • Barstool Sports saw a 25% YoY increase in social media followers

  • theScore saw a 7% YoY increase in MAU’s

  • And they also continue to launch Barstool’s sports betting operations in several new states. That drives lots of revenue growth.


(Ian) Balance sheet and liquidity:

  • Cash of $2.7B

  • $9.4B in PP&E, related to casinos

  • Not including leases, they have approximately $2.7B in debt

  • Makes a net cash position of about $20mm

  • Should check out updated balance sheet at 10-k

  • A variety of debt tranches (2023,2025,2027,2029) Rates ranging from 2.5% to 5.625%

  • 2.75% convertible notes ($330m) due in 2026

  • Raised in May 2020 (conversion price of $23.40, a 50%+ premium to share price at the time)

  • $750 million share repurchase program over 3 years

  • Interest is a fairly major expense for Penn National. This is a levered company and should be taken into consideration when making purchase decisions. Cash does offset leverage currently.


Anecdotal Evidence:

  • (Ryan) I’m not really much of a gambler, but I do like several of the Barstool podcasts.

  • (Brett) If sports betting was legal in WA, I think there is like a 50% chance I download the Barstool app and use it. Not a sure thing for me but I think it is going to be a go to for around 5 million guys in North America.

  • (Ian) I listen to barstool podcasts occasionally. I’ve never used the barstool sportsbook, and not really a gambler


Future growth opportunities:

  • (Ryan) Penn Interactive. I like that they’ve consolidated their media/digital initiatives into one strategy. And in particular, I like the barstool mobile sportsbook. They said it generated more than $2B in handle (total dollar amount being wagered) in 2021. And that accelerated big time in the 4th quarter. For reference, Q4 cross gaming revenue was up 130% versus the 3rd quarter (partially due to NFL season, and partly due to new state launches).

  • (Brett) MyScore gambling in Canada and integrating the iCasino technology as the backbone for all their initiatives. Ontario just went live with sports betting and MyScore is super popular their (Canada’s largest province). Executing on this region over the next 2 - 3 years will be crucial for the company to prove the MyScore acquisition was worthwhile.

  • (Ian) Acceptance and adoption of gambling. There does not seem to be any sort of significant stigma around sports betting with our generation. Many of my friends gamble. It feels like any serious sports fan of our generation bets on sports. Who knows what it means for society, but it does appear to be a tailwind


Highlights and lowlights:

  • (Ryan) Highlights: I do think the barstool brand allows them to acquire customers for sports betting at a cheaper cost. Also the shift to digital betting, just broadly speaking, should be better for gross margins over time. Lowlights: I don’t like how they hold analysts’ hands during conference calls. Sports betting is ultra-competitive right now. I don’t have much visibility into the payback on some of their acquisitions. And also more of a personal lowlight, but I have a terrible grasp on the regulatory landscape around the entire business.

  • (Brett) Highlights: MyScore and Barstool acquisitions, durable tailwind that should be sports betting legalisation over the next decade, moving towards vertical integration. Lowlights: Messiness in a lot of the casino operations, unclear what long-term margins will be, unclear when other states will legalize sports betting. Missing out on NY betting license (although CEO says taxes make it a terrible state to be in anyways).

  • (Ian) Highlights: Barstool partnership / acquisition was very smart. Access to the new generation. Industry tailwinds Lowlights: Heavily dependent on regulatory environment.



Bull case:

  • (Ryan) They see mid-single revenue growth from their retail locations, digital sports betting becomes a much bigger percentage of revenue, and they’re able to generate true FCF margins north of 10%.

  • (Brett) All the pieces (MyScore, Barstool, iCasino backend, land operations) come together nicely and this is an sports and gambling giant doing a few billion in levered cash flow a year.

  • (Ian) Disney of the gambling world. Digital, in-person, media. They are able to generate more from each customer (omni-channel)


Bear case:

  • (Ryan) If FCF/share can’t grow at a double-digit rate over the next 5-7 years, I think this investment will underperform. A few things that I think could prohibit them from getting there would be (1) Perpetually high spending to sustain market share in sports betting (2) Slow-moving regulatory environment (3) A broad shift to online gambling hurts Penn’s retail locations.

  • (Brett) A few bear cases come to mind: Margins never materialize, states keep procrastinating legalizing sports betting, the “synergy” advantages erode away as the legacy players get to scale, capital structure means no excess cash generation for shareholders

  • (Ian) Other sportsbooks move faster. Barstool does not maintain its popularity and any omni-channel advantage is lost


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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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