PENN Entertainment’s stock price has taken a beating over the past six months, shedding 27.3% of its value and falling to $14.00 per share. This might have investors contemplating their next move.
Is now the time to buy PENN Entertainment, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think PENN Entertainment Will Underperform?
Despite the more favorable entry price, we're swiping left on PENN Entertainment for now. Here are three reasons we avoid PENN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, PENN Entertainment grew its sales at a 14.2% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, PENN Entertainment’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.9%, meaning it lit $1.94 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, PENN Entertainment’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
PENN Entertainment doesn’t pass our quality test. After the recent drawdown, the stock trades at 14.4× forward P/E (or $14.00 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
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