Stifel Nicolaus recently raised its price target on Penn National Gaming (PENN) by 80% (from $47 to $85), saying the “Portnoy Momentum Trade”—along with the recent launch of the Barstool Sports app, which did $11 million in handle over its first 48 hours—should continue to drive the regional casino and sportsbook operator’s share price upwards as “sports-betting euphoria” swells this fall. PENN stock has increased +130% since January, when the company took a 36% stake in Barstool Sports—the media outlet founded by Dave Portnoy. Stifel’s $85 price target, the highest forecast among 13 Wall Street analysts covering the name, represents +21% upside to the company’s share price at Friday’s close ($69.85).
The investment in Barstool Sports helped Penn National’s Jay Snowden and Co. “transform a company with too much leverage and very little identifiable growth into something that now has a very clear opportunity to grow,” said David Katz (managing director at Jefferies, LLC). But Jed Kelly (executive director at Oppenheimer & Co.), an equity research analyst with a focus on consumer internet, warns: “Portnoy is Barstool, and PENN is betting on the Barstool brand to be their customer acquisition channel.” Considering Portnoy’s checkered past (see: use of racist language in videos, sexist blog posts and accusations of inciting harassment) it is fair to ask if the company should be betting (pun intended) its future on the internet provocateur.
Katz, a long-time PENN analyst, said he sees “the pluses and risks [associated with the controversial founder] as being relatively balanced. [Portnoy’s] following and the growth in the following of that media platform is incredibly impressive—as is their ability to engage people who like sports.” On the other hand, “there is key-man risk within Barstool” greater than investors will find elsewhere, he said.
Part of the reason the key-man risk surrounding Portnoy is so great is because PENN operates in a highly regulated sector and “gaming commissions, on a state-by-state basis, have their historical sensitivities,” Katz explained. Portnoy’s propensity to promote irresponsible gambling “is certainly a concern investors will and should raise in evaluating PENN stock,” the Jefferies analyst said, but both he and Kelly believe that if/so long PENN and Barstool remain focused on compliance Portnoy will manage to avoid a problem. For what it’s worth, Gaming Commission fines for ‘inappropriate advertising’ can exceed six figures.
The potential to run afoul of SEC guidelines is another reason why the key-man risk surrounding Portnoy is enhanced. Kelly, however, does not see that as a serious threat either—despite the Barstool Sports founder’s tendency to pump the Penn National stock. That’s because the gaming company keeps Portnoy at arm’s length from material decisions (remember, he’s not an officer of the company; he’s a shareholder). Plus, as the Oppenheimer analyst noted, “We’ve seen Elon Musk, who has done more egregious things than Portnoy on Twitter (of course, strictly from an SEC violations standpoint), still able to operate [his] company.” Katz is referring to a tweet, in which Musk stated he would take Tesla private a $420/share; he and Tesla were fined $20 million apiece for it.
Portnoy and Musk are not the first founders with the ability to move stock prices with a single comment (see: Steve Wynn, Sheldon Adelson). However, unlike the business leaders of yesteryear, Davey Daytrader and the SpaceX founder have access to social media and a retail-heavy stock market that has supercharged their voices. PENN is among the Top 100 most popular stocks on the retail-trading platform, Robinhood.
Portnoy’s tendency to cross boundaries may present the greatest threat to PENN investors. “When you’re dealing with an outlandish personality there is always a possibility he or she says something offensive,” Kelly explained. While he acknowledges that if you “take Dave Portnoy away from Barstool, the brand losses a lot of its luster,” Kelly says he just does not “see any way [Portnoy] will do something so stupid that he’s no longer the face of the Barstool brand.” Katz wasn’t as certain about Portnoy’s ability to keep his nose clean but said, “If we [at Jefferies] felt there was too much risk, we might have a different rating on the stock” (they have been neutral on PENN since January). It should be noted that last Thursday PENN announced a public offering of 14 million shares—a sale that could raise upwards of $1 billion. The company lost more than $800 million in H1 2020.
When asked if there are internal concerns that Portnoy could land the company in hot water, PENN referred us to Snowden’s keynote interview at SBC North America. The president and CEO said the company “obviously spent a lot of time doing diligence on Barstool” before making an investment. “I look at the actions of what they’ve done and what they’ve become as a company [since Erika Nardini was named CEO], and we got really comfortable,” Snowden said. “Yes, there’s going to be some videos from years ago that might make you a little uncomfortable because they were edgy and an attempt at humor, but you look at the company today and all the progress they’ve made, and we’re very proud to be their partners.”
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