One Crow isn’t having a winter for Penn National Gaming (NASDAQ: PENN)
After a long period of travel, Penn National Gaming, Inc. (NASDAQ: PENN) the stock broke. Unfortunately for shareholders, this has gone in the wrong direction – dropping as much as 21% in one sitting. As missed profits started the downward movement, a controversial Business Insider article about Barstool Sports founder Dave Portnoy added fuel to the fire.
Check out our latest review for Penn National Gaming
The company reported a poor third quarter result with lower profits and profit margins, although revenues improved.
Third Quarter 2021 Results
- Returned: US $ 1.51 billion (up 34% from Q3 2020).
- Net revenue: 86.1 million US dollars (down 39% compared to 3Q 2020).
- Profit margin: 5.7% (compared to 13% in Q3 2020).
The company reported a poor third quarter result with lower profits and profit margins, although revenues improved. Higher expenses resulted in lower margin. Over the past 3 years, on average, earnings per share have fallen by 3% per year, but its stock price has increased by 43% per year, which means it is well ahead of earnings.
The company has been in the limelight, not because of the mildly disappointing earnings report, but mainly thanks to the Business Insider article which portrays a negative image of Barstool founder Dave Portnoy. As a reminder, Penn owns a 36% stake in Barstool Sports, which they acquired in January 2020.
While Business Insider has reflected on Mr. Portnoy’s lifestyle, it should be noted that he has been a very open person about it for years. In terms of the market, we could say that its behavior must be taken into account in its projects.
Yet capitalism is somewhat amoral, and institutions like Credit Suisse recognize this. Their analyst Benjamin Chaiken reiterated the outperformance rating, citing long-term history intact and expecting a positive surprise with the Score business in Canada.
Additionally, Prescience Point Capital Management called the sale a “big dislocation from real business fundamentals,” setting a price target of $ 75 just on the core casino business.
Estimating value using a discounted cash flow (DCF) model
There are a number of ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. If you would like to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
What is the estimated valuation?
We use what is called a two-step model, which means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value.
We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow down during this period. We do this to reflect the fact that growth tends to slow down sooner than later.
Usually we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 665.1 million||US $ 727.3 million||US $ 773.2 million||US $ 811.9 million||US $ 845.1 million||US $ 874.2 million||US $ 900.5 million||US $ 924.7 million||947.5 million US dollars||US $ 969.5 million|
|Source of estimated growth rate||Analyst x7||Analyst x5||Is 6.3%||Is @ 5%||Is 4.09%||East @ 3.45%||Is @ 3%||East @ 2.69%||East @ 2.47%||East @ 2.32%|
|Present value (in millions of dollars) discounted at 9.8%||US $ 606||US $ 604||585 USD||US $ 559||US $ 530||US $ 500||US $ 469||US $ 439||US $ 410||$ 382|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 5.1 billion
The second stage is also known as the terminal value. This is the cash flow of the business after the first stage. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount terminal cash flows to their present value at cost of equity of 9.8%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 970 million × (1 + 2.0%) ÷ (9.8% to 2.0%) = US $ 13 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 13 billion ÷ (1 + 9.8%)ten= US $ 5.0 billion
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is $ 10 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current price of US $ 61.8, the company seems around fair value at the time of writing.
We would like to point out that the most critical inputs for a discounted cash flow are the discount rate and, of course, the actual cash flow. DCF does not take into account the possible cyclicality of an industry or its future capital needs, so it does not give a complete picture of its potential performance.
Since we view Penn National Gaming as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC), which takes into account the debt. We used 9.8% in this calculation, which is based on a leveraged beta of 1.783. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with an imposed limit between 0.8 and 2.0, a reasonable range for a stable company.
The recent turmoil has pushed the valuation of the PENN lower, but our model shows that this is not the reason to abandon the stock. In addition, institutions remain optimistic, valuing it at more than 20% compared to current levels.
Although the valuation of the company is important, it shouldn’t be the only metric you look at when looking for a business. The DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company.
For Penn National Gaming, we’ve put together three fundamental The factors you should consider in more detail:
- Risks: For example, we discovered 3 warning signs for Penn National Gaming (1 is a little worrying!) That you should know before investing here.
- Future benefits: How does PENN’s growth rate compare to its peers and the market in general? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow valuation for each NASDAQGS share. If you want to find the calculation for other actions, just search here.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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