Penn National Dips 8% On $1B Share Offering; Deutsche Sees 66% Downside

Penn National Gaming announced the start of a public offering to sell 14 million shares of its common stock pushing its shares down more than 8% in Thursday’s morning market trading.

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As part of the offering, Penn National (PENN) will grant the underwriters a 30-day option to purchase up to 2.1 million of additional shares of its common stock. The gaming company expects to use the net proceeds from the offering for general corporate purposes, it said.

Last month, Penn National reported a 2Q loss of $1.69 per share, versus the Street consensus of a loss of $2.06 per share. 2Q revenues of $305.5 million exceeded analysts’ estimates of $249.1 million.

Shares in Penn National have this year increased by a whopping 170%, with the average analyst price target of $59.42 now implying downside potential of about 7.4% to current levels.

Based on Wednesday’s close and assuming the issuance of the greenshoe, the transaction would raise about $1 billion in cash, Deutsche Bank analyst Carlo Santarelli estimated. Santarelli, who has a Sell rating on the stock with a $22 price target (66% downside potential), says he believes the raised capital is likely to be put to work towards competing in the highly promotional sports betting arena. More specifically, the analyst expects PENN to use the capital towards additional Barstool Sportsbook app content and Barstool branded retail sportsbooks.

“At 11.2x our 2022 adjusted EBITDAR forecast, versus the historical average multiple ~6.5x, the equity raise, in our view, should have been largely expected,” Santarelli wrote in a note to investors. “While we would not view the transaction as a positive for shares, we do believe it was a necessary strategic decision, given the run in shares and the unrealistic, in our opinion, implied value of the sports and iCasino verticals.”

“At current levels, we estimate the sports and iCasino segments represent roughly $6.2 bn of the $9.3 bn equity market cap, a valuation that far exceeds the value implied in peer equities with similar prospects for success in sports and iCasino,” the analyst added.

Currently, the rest of the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus is based on 10 Buys, 2 Holds and 1 Sell. (See PENN stock analysis on TipRanks).