On Tuesday, Raymond James initiated coverage on Penn National Gaming (NASDAQ:PENN) with an Outperform rating and a share price target of $20.00. The firm suggests that the current stock price reflects the challenges faced by the company, including underperformance in its digital segment and issues within its land-based operations.
The first quarter of 2024 presented a series of challenges for Penn National Gaming, marked by a decline in its land-based casino business, higher than anticipated losses in its digital operations, and a sell-off that the analyst described as a "punishing management penalty box."
Despite the setbacks in the digital segment, Raymond James believes that the market has already accounted for these issues within the stock's current valuation.
They estimate the fair value of Penn National Gaming's land-based business at $21 per share. Additionally, the interactive business has a potential value ranging between $0 and $7 per share, according to the firm's analysis.
The analyst from Raymond James pointed out that the upside potential for Penn National Gaming's stock is likely limited to around $20 per share. This is due to persistent discounts related to the interactive segment and the so-called "management penalty box."
These discounts are expected to continue until there is greater clarity on the path to profitability for the company's interactive business or a significant change in strategy is observed.
The $20 price target set by Raymond James is based on a sum-of-the-parts analysis. In this analysis, the interactive business is assigned a value of zero, and a slight "management penalty box" discount is applied. This approach reflects the firm's cautious but optimistic outlook on the stock's potential for recovery and growth.
InvestingPro Insights
As Penn National Gaming (NASDAQ:PENN) navigates through a tumultuous period, real-time data from InvestingPro provides additional context to the company's financial health and market position. With a market capitalization of $2.43 billion and a negative P/E ratio of -2.2, reflecting the challenges highlighted by Raymond James, the company's financials show a complex picture. The last twelve months as of Q1 2024 reveal a revenue decline of 3.29%, indicating headwinds in the company's operations. However, the gross profit margin remains relatively strong at 40.44%, suggesting that, despite revenue declines, the company maintains a degree of operational efficiency.
InvestingPro Tips highlight several critical factors for investors to consider. Penn National Gaming operates with a significant debt burden, which could impact its financial flexibility. Furthermore, the company is trading at high EBIT and EBITDA valuation multiples, which may concern value-focused investors. It's notable that Penn has not been profitable over the past year, and analysts do not expect profitability this year either. Moreover, the stock's volatility and the recent downward revisions in earnings by analysts underscore the risks involved.
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