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Penn National vs. MGM Resorts: Which Gambling Stock is a Better Buy?

The casino industry digitized its operations significantly last year to remain profitable amid COVID-19-pandemic-driven restrictions. This, along with the reopening of physical casinos made possible with the U.S.’ fast-paced, nationwide vaccination program, we think positions prominent industry players Penn (PENN) and MGM (MGM) well to grow significantly in the coming months. But which of these two stocks is a better buy now? Let’s find out.

Penn National Gaming, Inc. (PENN) and MGM Resorts International (MGM) are two established players in the Casino industry. PENN has ownership interests in gaming and racing facilities and video gaming terminal operations, with a focus on slot machine entertainment. MGM owns and operates integrated casino, hotel, and entertainment resorts. It operates through two segments—Domestic Resorts and MGM China. 

A transition from traditional casino tables to electronic gaming platforms has allowed the gambling and entertainment industry to remain profitable amid remote lifestyle and social distancing protocols over the past year. With more than 50% of the U.S. population fully vaccinated now, travel restrictions are gradually being removed. Consequently,  luxury hotels and physical casinos are expected to witness increasing foot traffic. And the commercial gambling industry is expected to grow at a 12.9% CAGR  over the next five years.

While MGM has gained 165.4% over the past year, PENN has returned nearly 162.4%. In terms of their past six months performance, MGM is a clear winner with 48.7% returns versus PENN’s 10.2%. So, which of these two stocks is a better pick now? Let's find out.

Latest Movements

On May 19,  the Baltimore Ravens announced a multi-year partnership with BetMGM, MGM’s exclusive sports betting division. BetMGM became the Ravens’ first official gaming partner. Under this partnership, the Baltimore Ravens and BetMGM will share revenue and rights as detailed in their partnership agreement.

On May 14, 2021, PENN announced  that the Indiana Gaming Commission had approved its demand to offer online sports wagering in Indiana. Once live, Indiana will become the company’s fourth online sports betting market, following  successful launches in Pennsylvania, Michigan, and Illinois.

Recent Financial Results

MGM’s revenue decreased 26.9% from the prior-year quarter to $1.70 billion for the first quarter, ended March 31, 2021. The company’s net loss came in at $331.83 million, which represents a 141.1% year-over-year decrease. Its EPS declined 142.1% from the prior-year quarter to $0.69.

For the first quarter, ended March 31, 2021, PENN’s revenue was  $1.30 billion, up 14.2% year-over-year. The company’s net income increased 115% from the same period last year to $91 million. Its EPS came in at $0.60, which represents a 111% year-over-year rise.

Past and Expected Financial Performance

MGM’s revenue decreased at a 25.4% CAGR  over the past three years. Analysts expect the company’s annual revenue to increase 603% for the quarter ending June 30  and 95.6% for quarter ending September 30. Its EPS is expected to grow 68.8% for the current quarter ending June 30 and 12.4% in 2021. Its EPS is expected to grow at 62.8% per annum over the next five years.

In comparison,  PENN’s revenue increased at a 6%  CAGR over the past three years. Its annual revenue is expected to increase 442.7% for the quarter ending June 30, 2021 and 50% in its fiscal year  2021. The company’s EPS is expected to grow 142.6% in the quarter ending June 30, 2021 and 150% in fiscal 2021. The EPS is expected to rise at a 141.9% rate per annum over the next five years.

Profitability

MGM’s $4.35 billion trailing-12-month revenue is 1.16 times PENN’s $3.74 billion. However, PENN is more profitable, with a 0.81% net profit margin versus MGM’s negative value.

Also, PENN’s ROA and EBIT margin of 1.70% and 10.40%, respectively, compare favorably with MGM’s negative values.

Valuation

In terms of forward EV/S, MGM is currently trading at 4.70x, which is 14.2% higher than PENN’s 4.03x. In terms of Forward EV/EBITDA, MGM’s 24.96x is 53.5% higher than PENN’s 11.61x.

So, PENN is the more affordable stock.

POWR Ratings

PENN has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, MGM has an overall C rating, which represents a Neutral. The POWR Ratings are calculated by considering 118 different factors, with the weighting of each optimized to improve overall performance.

MGM has a C grade for Quality. This is justified, owing to its negative EBITDA margin versus  the 10.43% industry average. In comparison, PENN has a B grade for Quality. Its 19.82% EBITDA margin  is 47.37% higher than the 10.43% industry average, which is in sync with its Quality grade.

MGM has a C grade for Growth. This is justified, as the company’s revenues declined at a rate of 25.4% over the past three years. PENN has a B grade for Growth. The company’s revenues increased at a 6% CAGR over the past three years, which is consistent with its Growth grade.

Of the 30 stocks in the Entertainment-Casinos/Gambling industry, PENN is ranked #10, while MGM is ranked #18.

In addition to the POWR Ratings grades we’ve just highlighted,  MGM and PENN are graded for Value, Momentum, Sentiment and Stability. Click here to see the additional ratings for MGM. Also, get all PENN’s ratings here.

The Winner

The Entertainment-Casinos/Gambling industry has been making a valiant  recovery from  pandemic-led damage, making the backdrop favorable for both PENN and MGM. However, PENN seems to be the better buy here based on its lower valuation and greater earning growth potential.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about other top-rated stocks in the Entertainment-Casinos/Gambling industry.


PENN shares were trading at $82.19 per share on Wednesday afternoon, up $2.45 (+3.07%). Year-to-date, PENN has declined -4.84%, versus a 12.39% rise in the benchmark S&P 500 index during the same period.



About the Author: Ananyo Guha Niyogi

Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand.

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