The stock of Penn National Gaming (NAS:PENN, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $86.62 per share and the market cap of $13.5 billion, Penn National Gaming stock is believed to be significantly overvalued. GF Value for Penn National Gaming is shown in the chart below.
Because Penn National Gaming is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 12.06% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Penn National Gaming has a cash-to-debt ratio of 0.17, which is worse than 70% of the companies in Travel & Leisure industry. The overall financial strength of Penn National Gaming is 3 out of 10, which indicates that the financial strength of Penn National Gaming is poor. This is the debt and cash of Penn National Gaming over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Penn National Gaming has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $3.6 billion and loss of $5.95 a share. Its operating margin of 5.96% better than 72% of the companies in Travel & Leisure industry. Overall, GuruFocus ranks Penn National Gaming's profitability as fair. This is the revenue and net income of Penn National Gaming over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Penn National Gaming is -7.5%, which ranks in the middle range of the companies in Travel & Leisure industry. The 3-year average EBITDA growth is -57.8%, which ranks in the bottom 10% of the companies in Travel & Leisure industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Penn National Gaming's return on invested capital is 1.30, and its cost of capital is 10.96.
Overall, The stock of Penn National Gaming (NAS:PENN, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Travel & Leisure industry. To learn more about Penn National Gaming stock, you can check out its 30-year Financials here.
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