From its 52-week high of $142 on March 15, Penn National Gaming (NASDAQ:PENN) stock has lost 51% of its value in less than five months. If you’re thinking about buying PENN stock on the dip, I would wait until it trades in the $50s.
One of the financial metrics I use to judge whether a stock’s worth buying or not is the free cash flow (FCF) yield.
It’s not perfect, like all quantitative measures, but it gives you an excellent starting point for making a decision.
Penn has an FCF yield of 3.9% based on a market capitalization of $10.89 billion and a trailing 12-month (TTM) FCF of $428 million. I generally consider anything 4% or higher to provide a decent margin of safety. The higher the FCF yield, the higher the margin of safety.
Of course, as I said, this is but one thing I’ll use to evaluate a company. More often than not, I’m more into the qualitative side of things. How does it make money? Is the business model sustainable, etc.?
I will say this. At its 52-week high, PENN stock had an FCF yield of 1.9%. I would have been hard-pressed to buy at those prices.
You can buy much better growth at that yield. For example, Microsoft’s (NASDAQ:MSFT) current FCF yield is 2.6% [$55.8 billion TTM FCF divided by $2.16 trillion market cap].
I think it’s fair to say Microsoft is a much better company than Penn National Gaming. And a much better long-term investment for the average retail investor.
A Closer Look at PENN Stock
Sitting on the cusp of my 4% guideline, it’s important to remember that this is a guideline, not an absolute rule. I’ve learned the hard way that sometimes it pays to be flexible.
However, in this case, I’m going to suggest that an FCF yield of 5% provides a buyer with a much better margin of safety. So, either Penn’s TTM FCF increases to $545 million [$10.89 billion multiplied by 5%], or its market cap drops to $8.56 billion or $54.73 a share.
Let’s round it up to $55.
Penn’s done okay over the two-year period if you consider its Q1 2021 and Q1 2019 quarters. Revenues fell 0.6% to $1.27 billion while adjusted its adjusted EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent) of $447.0 million, 14.2% higher than two years earlier.
That’s not enough growth to get me excited about buying. There has to be more steak to the sizzle for me to consider PENN stock.
I last wrote about Penn almost a year ago to the day. At the time, I was confused by the company’s stock price continuing to rise despite obvious signs that its business hadn’t fully recovered.
I was, however, positive about its Barstool Sports investment. But on that front, I suggested that when it comes to sports betting and iGaming, DraftKings (NASDAQ:DKNG) was a better buy because it’s a pure-play investment in the industry.
It’s got a ton of physical casinos that will continue to face the wrath of newer and more contagious Covid-19 variants. Wave after wave, casinos will be forced to shut their doors no matter how much a particular state’s governor values freedom over the safety of their constituents.
In Penn’s Q1 2021 conference call, the word Barstool is uttered 36 times. That’s how important it is to the company’s future. From everything said in the call, its investment and partnership with Barstool Sports is going well.
Hopefully, we’ll get more financial details in the Aug. 5 conference call for its second-quarter results. However, I would think the value of Penn would rise exponentially should it acquire the remaining 64% it doesn’t already own.
But that’s a subject for another day.
The Bottom Line
My InvestorPlace colleague, Mark Hake, is absolutely pumped about Penn’s future. He believes PENN stock is worth $115 based on a forecast 15% FCF margin and a 5% FCF yield.
The problem is he compares Q1 2021 to Q1 2020. That provides the illusion of massive growth. However, over a pre-Covid comparison, its results aren’t nearly as glowing.
Hake sees Penn’s FCF rising to $725 million in 2022. That’s 69% higher than its current TTM FCF of $428 million. That’s a big jump over seven quarters.
However, my colleague rightly points out that the average and median target price — $108.00 and $104.31, respectively — is very close to his $115 estimate and much higher than its current share price. Furthermore, analysts rate it “overweight” at the moment, with nine buys out of 16 analysts.
Interestingly, two analysts view it as a sell with the lowest target price set at $33. That might be a tad pessimistic.
Look, I was wrong about PENN last August. It went from $52 on the day my article was published all the way to $142 in mid-March. It trades today around $70.
This stock is Jekyll and Hyde. It’s hard to know which you’re going to get.
Risk-averse investors absolutely shouldn’t buy PENN stock until it’s in the mid-$50s. Then, if they can take more risk, go ahead and buy. However, from where I sit, DKNG is still the better bet for speculative investors.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.