Is Penn National Gaming’s stock plunge a buying opportunity?

Penn National Gaming‘s (NASDAQ: PENN) The stock price fell sharply after the release of its third quarter (Q3) 2021 results on Nov. 4. After missing Wall Street consensus earnings estimates, the company’s shares slumped by 21% at market close. Although they increased slightly after hours, the drop raises questions about Penn’s situation. Does this reveal any major problems, or has a mixture of investor reluctance and a perfect storm of circumstances caused the crisis? Here’s a look at why a cautiously bullish outlook might be warranted.

Penn’s third quarter results

The casino, racetrack and online sportsbook operator said their revenues increased 33.8% year-over-year and 11.6% from the third quarter of 2019, to reach $ 1.51 billion. This turnover is in line with analysts’ expectations. However, adjusted earnings per share (EPS) fell year over year, falling about 44%, from $ 0.93 per share in the third quarter of 2020 to $ 0.52. While two-year stack EPS rose 36.8% from $ 0.38 in the third quarter of 2019, the results generated a negative surprise 41.6% below the average expectations of major analysts.

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In the “Third Quarter 2021 Results Presentation” accompanying the press release and earnings call, Penn National highlighted the two-year stack rather than the comparisons to 2020. Although this tends to mask the decline in benefits, the approach may have some merit, given the extraordinary conditions of the past year. Compared to the pre-pandemic 2019, the company appears to have a strong and steady growth trajectory, with revenues, earnings and earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) rising sharply. The EBITDAR margin increased by 688 basis points between October 2019 and October 2021, from 30.4% to 37.2%, although the latter figure is somewhat lower than the margin of over 40 % of 2020.

On the third quarter earnings conference call, CEO Jay Snowden said the “momentum” at the start of the third quarter would have led to results comparable to last year, but “Hurricane Ida, which hit us considerably in the South region, and the regional blowout ups of the Delta variant “reduced performance.

Significantly, Penn National’s record appears to be healthy. The company had $ 2.7 billion in cash at the end of the third quarter, compared to $ 2.7 billion in debt, with net debt of $ 45 million. It is also investing in future growth, using $ 923 billion of that cash, along with approximately $ 1 billion in borrowings, to acquire Score Media and Gaming Inc. The acquisition gives it a solid Canadian footing, as Score Media’s theScore app is the most popular sports betting platform in this country. Snowden noted that theScore “is uniquely positioned to capitalize on the legalization of sports betting on a single event in Ontario” and that it will be integrated with Barstool Sports (a media company and sports betting application operator in which Penn owns a 36% interest) for marketing and other purposes.

The tumult of David Portnoy

The same day Penn revealed its third quarter results, Business Insider published an article about David Portnoy, president of Barstool Sports. The Business Insider article alleges that Portnoy engaged in potentially violent sex acts with multiple women.

While the timing of the article, which was published around the same time as Penn’s earnings release, likely contributed to the share price falling, it is not clear whether the allegations will have a long term impact on Penn.

Since then, Portnoy has responded to the allegations on Twitter, describing the article as a “bestselling article” and saying he “never did anything weird with a girl, never, never anything non-consensual.” The end result of the charges, of course, remains to be seen.

Conditions in the sports games of chance market

Industry headwinds may also be at play here. After enjoying a bull run during COVID-19 closures and the government shutdown of physical casinos for several months, the sports betting and online sports betting markets appear to be cooling. A long trail of growth still awaits sports betting companies as a whole, but Wall Street appears to be getting more cautious about simply dumping money into sports betting stocks. Top level industry leader DraftKings (NASDAQ: DKNG) saw an almost 5% drop in a day after a pair of analysts said its profitability surge is expected to take years depending on industry events.

Penn National owns casinos and physical racetracks, but its Barstool Sportsbook app still attracts media attention. If traders and institutions are wary of investing in the sports betting industry, this is additional pressure fueling other bearish feelings about Penn. While investor caution in sports betting stocks is unlikely on its own to cause Penn’s stock to sell off, it could amplify the effects of the third quarter results and the Portnoy scandal.

Where Penn National is likely to go

The three factors – a shortfall, the Portnoy restlessness, and a recent overall drop in sportsbook stocks – appear to have combined into some sort of stock market piledriver to crush Penn National to a 52-week low in a matter of hours.

Penn National still appears to have a lot of potential going forward, and its third quarter report contains some significant positives despite the fluctuating earnings. Its stock value may remain depressed for a few days, a week, or two, but it seems likely to rebound fairly quickly. Investors interested in consumer discretionary stocks and not averse to a bit of risk may even want to view its current crisis as an opportunity to buy its stocks at a significant discount.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.