Shares of gaming company PENN (PENN, Financial) declined 9.6% in the quarter and penalized performance by 10 bps. This was due to investor concerns that a potential recession would result in a slowdown or decline in its earnings growth rate. However, thus far, the company has seen no material change to visitation or spending levels, and its earnings remain strong. PENN is generating strong cash flow, which it continues to use to invest in its digital growth opportunity, while using excess cash to buy back its stock. PENN is well positioned to weather a slowdown or recession, and we believe that even if one does occur, the company would still generate revenue and EBITDA above pre-pandemic levels. We consider the $50 million of losses this year from its digital business to be modest in relation to PENN’s over $1 billion of EBITDA from its casino business. The losses from its digital business represent customer acquisition costs incurred as additional states legalize online gambling. Since it is far less expensive to retain existing customers than to acquire new ones, we expect marketing costs to decline as PENN builds its customer base. PENN’s core bricks and mortar casino business remains strong, and the company’s healthy regional casino business and strong balance sheet enable it to absorb its digital losses.
From Ron Baron (Trades, Portfolio)'s Baron Focused Growth Fund third-quarter 2022 commentary.
