PENN Entertainment’s 39.7% return over the past six months has outpaced the S&P 500 by 26.6%, and its stock price has climbed to $21.09 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy PENN Entertainment, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.We’re glad investors have benefited from the price increase, but we're cautious about PENN Entertainment. Here are three reasons why you should be careful with PENN and a stock we'd rather own.
Why Do We Think PENN Entertainment Will Underperform?
Established in 1982, PENN Entertainment (NASDAQ:PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, PENN Entertainment grew its sales at a sluggish 4.3% compounded annual growth rate. This was below our standard for the consumer discretionary sector. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for PENN Entertainment, its EPS declined by 37.4% annually over the last five years while its revenue grew by 4.3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, PENN Entertainment’s ROIC has decreased significantly over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
PENN Entertainment falls short of our quality standards. With its shares beating the market recently, the stock trades at 153x forward price-to-earnings (or $21.09 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. We’d suggest looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
Stocks We Would Buy Instead of PENN Entertainment
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