Penn National Gaming (NASDAQ:PENN) produced excellent results for the first quarter, showing that the casino gaming company is now producing free cash flow (FCF). As a result, PENN stock is likely to move significantly higher once the market sees it generate large amounts of cash.
Penn National Gaming has 42 gaming and racing properties spread over 20 states across the U.S., mostly under the Hollywood Casino brand name. It also has a 36% interest in Barstool Sports and uses that brand in its mobile gaming app.
As I wrote in my last article, PENN stock is worth $17.85 billion. That is 62.3% higher than its market value of $11 billion, as of Friday’s close. In turn, this implies that PENN stock is worth $114.12 per share, or 62.3% over its price of $70.33. Here is how that price target came to be.
Penn National’s FCF
The company produced stellar Q1 results, with huge cash flow gains.
For example, Last year during its Q1 2020 Penn National lost $9.6 million in FCF. But in Q1 2021, Penn National made $1.2749 billion in revenue and $180.5 million in CFFO. It also spent just $25.7 million in capital expenditures. This means its FCF was $154.8 million and its FCF margin was 12.1% ($154.8 million/$1,274.9 million). We can use this to determine its long-term true value target.
Analysts now forecast revenue for 2021 will be $5.65 billion and it will rise 6% by 2022 to $5.99 billion. Using these numbers we can estimate its future FCF profitability.
This is seen by multiplying the company’s 12.1% FCF margin with its 2022 sales forecast of $5.99 billion. That implies that its 2022 FCF could reach $724.79 million.
In reality, it seems highly likely that Penn’s FCF margin could rise to 15% from 12.1%, given the growth in its operating leverage and as people return to gambling. That raises its 2022 FCF estimate to $899 million.
What Penn National Is Worth
Now we can use this to value PENN stock. For example, if we use a 5% FCF yield, the implied value is $17.98 billion. This is seen by dividing its FCF estimate of $899 million by 5%, resulting in a total $17.98 billion market value target.
Now, this figure is 63.45% higher than the stock’s $11 billion market value. In turn, this implies that PENN stock should be worth 63.45% more than its price today of $70.33. That results in a price target of $114.95.
Note that this is slightly higher than my earlier target price of $114.12. This is mainly due to the slightly higher revenue estimates that analysts now have for Penn National than when I wrote about it earlier.
What To Do With PENN Stock
Analysts tend to agree with me. For example, TipRanks reports that 10 analysts have an average price target of $99.50, which would be up 41.5% from Friday’s close. Also, Yahoo! Finance reports that 13 analysts have an average target price of $106.50. Seeking Alpha says that 15 analysts have a similar target at $106.23. These are all very close to my $115 price target.
As a result, expect to see Penn National produce excellent Q2 results that will underline what I am saying about its FCF generation ability. The gaming company will reveal its results on Aug. 5. Investors should consider taking a position in the stock before then.
It is likely that they can make money once the market understands just how much cash the company generates. Expect to see PENN stock reach $115 or higher sometime in the next year, or over 63% higher.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.