Chit Chat Stocks - Penn National Gaming (PENN) | Not So Deep Dive

Episode Date: February 22, 2022

Penn National Gaming owns and operates gaming and racing properties. The company has had recently popularity for its Barstool Sports, sports betting. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Penn National Gaming. Enjoy the show! This episode is sponsored by Commonstock, a social network for smart money investors. Check-out the platform here: https://commonstock.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Contact us: [e-mail] Timestamps Company Background | (3:55) Industry | (9:48) Management & Ownership | (12:21) Valuation | (16:05) Earnings | (19:20) Balance Sheet | (22:20) Our Analysis | (26:50) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chit Chat Money. This is the show where we go over an individual stock for about 30 to 45 minutes. Well, sometimes it's been more

towards an hour lately. We'll try to condense it back down to the 40-minute range because that's kind of the sweet spot of what we want to do for these episodes. But we had Ian Grange joining the show as always every other week. This is Ian's turn and we're doing Penn National. This was Ryan's choice, if I'm not mistaken. Yep. And why did you choose it? I know it's the big bar still one. So everyone knows it for that association, but is there any other reason besides that being kind of a fun episode with that company? Growth hack. It's well followed. So this is a chance to get a whole bunch of listeners for the episode. Now, I don't know. It's interesting and it's been if i'm not mistaken it's been kind of washed out over the last year that's true it wasn't

me in stock uh big time me in stock because of well you know poor no over a bar still kind of had a yeah he was he was a big reason for that um ian have you heard of this stock at all followed at all before this episode i've heard of it and not followed it very closely just kind of see have seen the rise in the fall you know i used to every once in a while i'd tune into uh what was it? Daily, daily global trade or whatever. See what, see what was going on. Get the Scrabble letters. That's exactly. Yeah. It's this version of a DCF that, I mean, that stuff was pretty funny, but yeah, I guess it's hard not to have heard of Penn national just because of all the stuff went around it, but we're going to get into actually the details of what the

company actually does. Um, it's more than just Barstool as some people might think it is. And And I'm going to let Ryan talk about that. But first we have to talk about our advertiser, our sponsor for our Tuesday episode. And it is common stock common stock is a platform. And I'm going to kind of just go off of how I feel about it. Cause I actually started on it and I put a post on there. It's under, I don't know if you search my name,

you'll be able to find it's for match group. And I linked to our fund report that we did on them a few weeks ago. You can, instead of on Twitter where you're forced to only use 280 characters and And it's hard to find things. You can't get actually detailed analysis a lot of times. It's a lot of chirpy comments, all that stuff. Common stock is actually where you can write out your thesis reports. You can connect your brokerage account. And it's more of a very specific messaging and communication platform for investors who are wanting to do fundamental analysis.

There's probably technical analysis people in there as well, whatever type of stuff you like. So, for example, I posted the match group report. I did like nine different bullet points of why we like the company. And then, you know, Connor Mack from Investment Talk, he got to comment on it. He said, you know, whatever. And it's different than Twitter. And I like it more than that when you're putting out kind of a research report or something like that, because you can actually get a detailed back and forth instead of the, I guess you would call it what the chirpiness on Twitter, if that's a good way to put it. If you want to go, go check out commonstock.com. Very easy. It's free to use. You can connect your brokerage account and start following people on there who want to learn more about fundamental analysis. All right, Ryan, do you want to talk about Penn National Gaming? Yeah. Penn National is, I'll give sort of the one-liner here. Penn National is an omni-channel provider of gaming, both retail and online, live racing, and sports betting entertainment. And so it's a little difficult to describe the full extent of their operations

in, I guess, five minutes, because they really do a lot. And there's a lot of different, I guess, initiatives that they're trying. But I'll try to go through the most important stuff. So Penn National operates, according to their last 10K, which is now a little outdated, 41 physical properties across 19 states. So these physical properties include casinos, casinos slash hotels, racetracks. And then sometimes it's like a blend of all three, but the basic premise is that it's physical spots where you can go gamble. And so their revenue ends up getting broken into two segments. It's gaming revenue, which makes up the lion's share of the overall top line. And then food, beverage, hotel, and

other, which is really a negligible part. But most of the revenue within gaming comes from slot machines. So 85% of the last nine months of their gaming revenue, which is the majority of their top line, is all slot machines. I guess they have done a good job diversifying the business over the last year, at least with their acquisitions. So they acquired a 36% stake in Barstool Sports. I think that's how most people have probably heard of them. And then they bought out the brand called The Score for $2 billion more recently. Both those companies generate, well, Barstool generates revenue in a few ways, but they generate advertising revenue as well. I think The Score also does subscriptions because they report a

active user's number. I could be wrong on that, but I guess it isn't a huge part of the business anyways. But the last part before moving on to the history, they've made a recent push into what it calls its interactive segment. And so this includes retail sports betting. So that's in-person, online sports betting, online social casinos, which if you're wondering, there's online casinos, And then there's online social casinos. Online social is more free to play, I guess, playful, I guess, whereas you're not really like, you don't have to gamble your own money. Whereas online casino is just your typical iCasino. You can gamble your own money at different games, playing with different users as well. I believe this is where, one second, I believe this is where most of the people think that the growth will come from. This is sort of the, I guess, the push to digital. A lot of people are talking about the transition just broadly from land-based gambling to digital gambling.

This is really the segment that encompasses that. Brett, do you have something to say? Yeah, so you said 10K. We're trying to be more explanatory on the show. So can you explain what that is and where people could probably find it? Yeah, the 10K is just the annual report, their SEC filing that you have to file every year is about the company. You can find that on their investor relations page and or their, the SEC page.

I should actually go on a tangent here. We've gotten a few mentions before that sometimes we use terminology that's a little difficult to understand and we want to be accessible for new listeners. And so if there's ever any words that aren't familiar, it's our job to call each other out on it and describe what it is. And then we'll probably try to do a little explainer page on our website at some point as well. But I'll get into the history real quick. So Penn National's history was really rooted in horse racing. They were founded in the early 1970s by a group of community leaders from central Pennsylvania who decided they wanted to build a thoroughbred racing track.

They expanded from one racetrack into many over, I guess, the next decade, and they began to allow people to bet via phone as well. They also had a TV channel called Racing Alive, and then eventually they also built off-track wagering sites, so different retail locations where you could bet on the races, but you didn't have to be there in person. That was just a way to get more gamblers essentially. And so it was really all about racing until the late 1990s when they moved away from a pure, it was really a parimutuel system business. And I think Charlie Munger has made the analogy that the parimutuel system, which is the system used to price bets on horses, it's a lot like the stock market. So it's basically just a way, just a betting system. They moved away from that into more of a diversified gaming company.

And so they began installing slot machines at some of their properties. And that kind of led into the push into full-blown casinos. Today, they have, like I said, casinos, racetracks, sports books, which when we say the term sports book, for anyone that doesn't know, it's just a place where you can place bets on sporting events. And then hotels, bars, and even in some locations, it's a blend of all of them together. So Penn is also a serial acquirer. They buy tons of companies. Sometimes they buy small interests in companies as well. And then I guess other notes, they came public in 1994, back when it was only a racing company. They have done some follow-on offerings as well, most notably last year. Like Brett said,

it kind of got meme stocked. It's down, I want to say more than 60% off its highs, but last year they raised a billion dollars on a follow-on offering. So they were really able to capitalize on that. And now we're kind of revisiting it at a time when it's hopefully a better valuation. Brett, do you want to cover industry and landscape? Yeah, this one's an easy one. People are going to be able to understand it. So there are three big segments of what I would kind of describe it as.

Now they have some of the media properties, which is MyScore and Barstool, but we'll see how big that becomes over time. right now, those kind of early stage acquisitions for them. So the first one of their big categories is commercial gambling. And that industry hit a record $44 billion in spending in 2021 in the US. It was apparently a record year because of the stimulus checks, which personally, that's a bit depressing. But just as an investor, a lot of the analysts and a lot of even the pen executives on their conference calls said they don't expect that number to be as high in future years, but it's hopefully going to be a steady market. Now, the second category is sports betting, which

is the legalized sports betting market. We know that we're going to be talking about this in the analysis part on the second half, but it got legalized federally, but all the states have to do it individually. It's a very dynamic market. So we'll see when all the courts do all this stuff. But from all the sources I'm trying to get online, they say a lot of different numbers on annual spending. Some may be trying to do illegal combined with legal. Some may be just legal. I think I got a legal number, which is Statista, and they said $2.1 billion in spending in 2021 that is expected to grow to $10.1 billion in 2028. But really, with an unknown part about the courts in each state, it's hard to tell exactly when those numbers will be where they are. But

I guess the big takeaway is it's a fast-growing market. Now, the third category is North America iCasino market, and that is expected to hit $20 billion by 2026 and is also growing extremely quickly. That one seems like a very reasonable estimate, and it's pretty easy to track. Now, their competitors, again, these are well-known companies since a lot of these are consumer-facing. Everyone will know them. There's MGM, FanDuel, Wynn, Caesars, Las Vegas sands draft kings many many others and then my stool my score and barstool excuse me they're more in the sports media space i know they had a chart about who my score competes with they're actually the number one app in canada over espn which is quite impressive but they compete with

things like espn bleacher report um probably cbs sports that type of stuff you know for score updates all that good stuff with apps highlights um whatever that stuff is right ian do you want to move on to management and ownership for Penn. Yep. Penn got a new CEO fairly recently. His name is Jay Snowden. He originally joined Penn National in 2011 as a senior vice president. In 2014, he was promoted to chief operating officer, became president a couple of years after that, I think in 2017. And then he was given the job of CEO in January of 2020. And so that was a pretty kind of led into a tumultuous time for a company like this that does a lot of revenue in person. at casinos. And I think at one point, all of their properties were shut down at the beginning of

COVID in 2020. And so he stepped in right at a really interesting time. He ended up in the midst of that, they made their partial acquisition of Barstool. And so he was instrumental in that, but just a really a whirlwind between the acquisition of Barstool and COVID hitting all at the same time. In addition to him, there's been a little bit of turnover in the executive office. So there was a former CFO who started with Jay Snowden, who left after less than a year and was citing some stress and possibly having to relocate during COVID. And actually, the CFO before that cited some family issues when he didn't renew his contract. And so the CFO, I don't want to call it quite a revolving door, but the CFO office has not been super stable. Most recently,

they hired someone. The current CEO is someone who was an analyst for many years, I think at Barclays, um, and was a, uh, uh, managing or a partner and a, uh, analyst over there. So they brought her on as the CFO, um, a little bit about ownership. There's 1.7% insider ownership and insider ownership just means, um, anybody who's like part of the management team or on the board of directors or has some sort of, um, internal relationship with the company and owns the company. And so, like I said, about 1.7% of the company is owned by insiders. Most of that is owned by the chairman Emeritus, who was the former chairman of the company and still owns a lot of the stock. And so in some ways that's not really, I think he might still be on the board as well,

but it's not like the management team has most of that. Jay Snowden has, I think about 0.3% of the company. So I'm sure a healthy portion of his net worth, but not anything significant in terms of the decision-making of the company. I also want to make a quick note about management of Barstool. As we were talking about at the beginning, there's a lot of talk about Barstool as it relates to Penn National now. Something that has been a story in the last couple of earnings calls is Dave Portnoy, who is the founder of Barstool and is pretty closely associated with the Penn National brand now. I don't want to get into all the controversy and stuff around Portnoy, but if you're interested in this stock, you should probably do a little

bit of research and kind of decide exactly how you feel about the whole situation because over the last couple of earnings calls, there's been stories released at the same time as the earnings calls kind of accusing Dave Fortnoy of different things, which then he and the company come back and refute. But it just adds a little bit of crazy and a little bit of controversy around the stock. Yeah. I mean, it's worth visiting because not necessarily just because it's Portnoy and he's sort of a popular social figure now, but because it does, it has impacted the stock. So understanding whether that people might see that as a risk, people might see him as an opportunity, take it what you will, but know that it's definitely a part of the business now.

It's an opportunity for them to plant some stories and then buy back the stock at a depressed price, right? No, that's not what they're doing, but they do have a buyback program. I'll hit the valuation, market cap. I think everyone knows what this is. I don't want to explain this every time, but everyone knows that it's just kind of the value of the company. It's about $8.46 billion right now. Ticker is P-E-N-N. Now, one that we talk about a lot is enterprise value. And that is, okay, it's pretty easy to explain, but in audio form, it might be a bit difficult to understand. So I would look it up on Investopedia or whatever. It is market cap plus debt. So adding in the debt, which is those liabilities, and then minus cash. So that can get you an

enterprise value, which Xs out any sort of debt bearing interest and whatever, all that stuff. And then also you don't want to include the cash because that's technically available for shareholders. Now, sometimes you may not want to include the cash. And there's a lot of special situations where you may not want to, if the company's burning a lot of money, that cash probably isn't available for you as a shareholder, but for a company that's cashflow positive, like Penn National, you're going to want to exit that cash because they can return it to you in dividends or share repurchases. Now, Penn has, again, this is another complicated one. It's an enterprise value is about 9.4 billion. But if you include its financing obligations,

you kind of should, which isn't their standard long-term debt. It's these strange things that are kind of a unique long-term debt. They have 4 billion of that. And then their enterprise value would go up to about $13.4 billion if you include that. And then if you include their lease liabilities, because as a casino, they have a ton of operating leases. And some people include that in their enterprise value. Some people don't. If you include that, their enterprise value goes up to $17.9 billion. So as you can see, this is a company with a lot of liabilities. I think that is the big takeaway you'd want to have here is they do have a lot of costs that come in and this is not a digital business. This is not just barstool and their iGaming stuff is a lot of

physical infrastructure. I kept it simple here with the key valuation number. I have an EV to free cashflow of 17. Now that is just enterprise value divided by their free cashflow number. And that just gives you a ratio. And then it's 17. But this number that they likely gave us uh, before their 10 key K annual report came out, it's just operating cashflow minus CapEx. And given how much debt they have, I don't think their true free cashflow is actually as good as they're stating. Um, so EV to free cashflow 17, and then dilution has been pretty hot and heavy, um, because of acquisitions and capital raises. So you want to watch that, um, because it can hurt, you know, if you get more shares outstanding, if they do a common stock offering, they do all

that good stuff, your stake in the business goes down on a percentage basis. I would watch revenue per share growth with this one. If you actually look at it, revenue per share is down, I believe. It still is not back to its pre-COVID highs. I could be wrong about that, but definitely look at that revenue per share chart because the dilution is pretty heavy here. And going forward, I definitely look at revenue per share because revenue on itself is going to look really good because of all the acquisitions they're doing. All right, Ryan, do you want to hit earnings? I know this is a complicated one, so it might take a little bit of explaining. Yeah, I'll explain it to some extent.

I know some of our recurring listeners might be like, why are you explaining all this? So I think what we're probably going to do is we're going to end up putting a term sheet on our website or something with all the typical nomenclature we use. But I'll go through earnings. And the frustrating part with Penn's earnings was that it was riddled with adjustments. They, in fact, they had a ton of adjustments. they really cited their adjusted EBITDA number, which I don't think the EBITDA needed to get longer to begin with, but they stopped including rent expense on there as well.

But their revenue for the last 12 months was $5.9 billion. That's up substantially from last year, but up only about 11% from its 2019 numbers. Now they don't report their cashflow statement on earnings, which is unfortunate, but it has to be in there in their 10K. So that'll be coming out shortly. And they reported, they said that they generated $800 million in free cashflow in the conference call, which would equate to about a 14% free cashflow margin, which is just the percentage of revenue that they're generating in cash. Other, I guess, important numbers, They had $420 million in net income. The only reason I use that is because I don't have the true free cashflow number in front of me. But I guess if you had to pick one number to base it

off of, I'd use that 800 million number they reported. Other things that they do report during earnings, and I thought some of these were kind of funny, they report barstool follower increases. So barstool sports saw a 25% year-over-year increase in social media followers. I guess that does end up translating into customers. That's kind of the top of the funnel, so to say. So just kind of funny to see that. I think it was 144 million social media followers across all platforms. And then the score, which is the other brand they bought, saw a 7% increase year over year

in monthly active users. And then they also continued to launch Barstool's sports betting operations in several new states. And that actually drives a lot of revenue growth. So if you look at them, so Barstool has rolled out essentially this mobile sports betting app. And their goal is to try to blend their media side. So their popular sports personalities along with the sports betting. And so each time they roll that out into a new state, there's a big adoption from those barstool customers or barstool fanatics. And you see revenue jump. And we saw that quarter over quarter or in the fourth quarter here. So just know that's usually what it's attributable to. So I guess the more states that legalize it, the better the opportunity potentially for barstool and Penn National broadly. Ian, you want to go balance sheet?

Yep. The balance sheet is, this is of the last quarter because we don't have the updated balance sheet yet, but it might be out by the time this episode is out. But as of the third quarter, they had cash of $2.7 billion, $9.4 billion in property plan and equipment, which is an asset, but that's basically all of the stuff that's in all their casinos. They don't own the real estate, but any of the improvements they've made and all of the, you know, for their hotels and stuff, all of the beds and basically anything that they own, any physical asset that they own within those properties is in PP&E. So a fairly large amount of PP&E property plant and equipment. Not including the leases, they have about $2.7 billion in debt, which leads to a

net cash position of about $20 million. And like I said, you should check out the updated balance sheet once the 10K is released, the annual report for this most recent year. They've got a variety of debt tranches. So they've got debt that's due in 2023, 2025, 2027, 2029. And it's all kind of evenly spread out over that time with rates ranging from 2.5% interest to 5.625% interest. They've also got, I want to touch on these for just a moment, but they've got convertible notes that are due in 2026. And basically what a convertible note is, is it's a debt that you pay interest on, but it can convert into shares if the share price crosses the conversion price. And so if the share price goes above the conversion price, instead of getting just the debt payments, you can actually get the return of the equity holder. And so it provides the upside of equity with the safety of debt for the people who own the convertible notes. And so in this case, on their 2.75% interest convertible notes, there's about $330 million worth of them.

And they were raised in May of 2020 with a conversion price of $23.40. And so currently Penn National stock is at $49. And so it looks like, man, that was a great deal for whoever was getting the convertible notes because they converted. And the premium on that is pretty significant, or the return on that is fairly significant. But at the time, Penn National stock price was about $15 a share. There was concerns, I think, about going bankrupt. Most of their casinos were closed. They just needed cash. And so that was the price they had to pay for that was a fairly low conversion price, which at the time was a 50%, uh, 50% premium to the share price. So, um, it's not like that financing doesn't look great in some ways, but it was also

just a, uh, necessary at the time for them to get the cash they needed to run their business. Um, and, and, um, stay afloat basically. So another note on the balance sheet, um, They've decided to do a $750 million share repurchase program over three years. And so that'll take out somewhere around 3% to 4% of the share count. And then, as I think Ryan mentioned this earlier, but interest is a fairly major expense for PIN National. And they've got quite a bit of debt. And it should be taken into consideration when you're making purchase decisions if you

decide to buy PIN National. is that um there is leverage on this business and it's not just a digital business you should you should understand um how much they're paying in interest and what's kind of what the path forward to cash flow positive um is do you want to explain share repurchases quick sure so sherry purchases or go ahead already i was gonna say brett you already kind of explained it to some extent the i i will so we don't we probably don't have to belabor it but the uh leverage, I would just say this, the leverage sometimes doesn't look that consequential, like the debt doesn't look that consequential when times are good. So for example, they're

potentially generating $800 million cash this year. That makes the leverage not look so, I guess, like such a high hurdle. But if you look at the COVID numbers, suddenly that debt becomes a really, really big issue. Um, and so, yeah, I do think it's worth keeping that, uh, taking that into account. Um, do we want to hit a quick ad break? Yeah, let's take a break. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high-speed wifi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to

conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in next up we got anecdotal evidence this one will be easy ian uh anything with penn national i listen to a barstool sports uh podcast every once in a while never use the barstool uh sports book not really

a gambler um so it is legal where you're at right it is legal when i'm in arizona um it's not legal in california but it is legal in arizona all right ryan no i i'm not much of a gambler well it is illegal in our uh our neck of the woods so well sports betting is but like traditional don't, I don't think they have a Washington location. Yeah. Yeah. Like a Washington casino or anything like that. But the, uh, I do like a few barstool sports podcasts like, and that, I mean, they are the top, I think it's the top sports podcast in the world. If I'm not mistaken. Yeah. The most popular one. Yeah. Uh, they're one of the top studios out there. That is an interesting part of this asset that they'll pick up. I don't know how much that podcast

to publishing whatever our advertising business is worth, but it seems like it could be worth a decent amount. I don't know, compared to Penn National's enterprise value, we'll see. But if that continues to grow, it's not an immaterial part of this business, I wouldn't think. Yeah, agreed. What about, I mean, do you have any anecdotal? I mean, no, because sports betting isn't legal

and I don't like any of the casinos and I haven't been to one of theirs personally because they're more Northeast based and we're in Washington. But I think once or if it comes to Washington, there's a decent chance I'd download the Sparstool app to use it. I know there's so many choices. There's like dozens of different choices and they're almost all a commodity. But I don't know. I think that's a good thing. Like there is a little bit of a nudge for me to download them versus someone else compared to, say, FanDuel. And I think there's probably like 5 million guys, it's all guys, well, majority guys that in North America that will do that.

And that could be an asset for them once all these states and provinces in the United States and Canada come online. All right. Future growth opportunities. Ian, what kind of stood out for you when looking at Penn National? Yeah, so this one's a little bit of a cheapie, but I think the just the acceptance and adoption of gambling in the United States, there doesn't really seem to be that much of a stigma around sports betting with our generation. And I think that that's going to really benefit Penn National. It seems like, you know, I keep talking to more and more friends who are talking about sports gambling, and it feels like any serious sports fan in our generation is betting on sports. And I don't know whether that's a good thing for our society or a bad thing, but it surprised me how many of my friends are into sports gambling and are now that it's legal in Arizona, how many people have it on their phone. And every time we watch a game, making bets before the game, during the game, after the game, obviously for future games. But, um, anyways, whatever, whatever that means, it does seem to be a tailwind that our generation is, is happy and good with, uh, sports gambling for the most part. Yeah, it, I think that's a good, I think you raised a good question of whether or not that's good for society, but. Nah, it's a tailwind.

That's all that matters. We're creating shareholder value. It is a growth opportunity. No doubt about that. It is a growth. It is a tailwind. Yeah. All right, Ryan, go ahead.

My future growth opportunity is their Penn Interactive segment. That is, like I said, that's, I think, where a lot of people are expecting the growth to come from. But I like that they've consolidated basically all their digital and I guess you'd call it media initiatives into one strategy. And in particular, I like the Barstool Mobile Sportsbook. I talked about this briefly earlier, but they said it generated more than $2 billion in handle, which is the total dollar amount being wagered in 2021.

And that accelerated big time in the fourth quarter. So for reference, Q4, they call it, I'm putting this in air quotes, cross-gaming revenue. So their Q4 cross-gaming revenue was up 130% versus the third quarter. And part of that was due to the NFL season kind of coming to a close. Not entirely, but a lot of that was in the fourth quarter. And then it was also partly due to two new state launches for the Barstool Mobile Sportsbook. I think they're able to pair that really well with their brand and their personalities. And I mean, they are very popular.

That's where that sort of follower count becomes relevant because that really does become a top of the funnel, a place for people to easily find the mobile sports book. Yeah. And one thing to note here is when you're looking at the company, so the sports book stuff is run by Penn, but they only own 36% of Barstool right now, but they have like these kind of option contracts or it's a complicated deal, but they have the ability to take out 100% of the company in early 2023. So that'll make this segment even more attract a larger part of this business because they're missing out on the full amount of Barstool's media and non-sports

spinning part, which it's a bit complicated looking at it because you would think the companies are the same right now, but they're still slightly separated. Does that make sense? Am I describing that correctly, guys? Yeah. And there's also different contracts in, there's different terms in their contract that like certain parts of the business are, if I wasn't, it's kind of complicated. I'll pull it up right now, but there's like, It grants Penn national certain rights to like, Oh, and there's a preferred stock thing that they've given out to the

barstool employees. Yeah. I mean, if you really want to get into the details, there's that too. Ryan, you can look it up while I'll talk about my future growth opportunity. If you have any notes on that.

But mine is my score gambling in Canada. So my score, unlike in United States in Canada, because my score is so popular, they're going to do my score gambling just because they already have so many users up there and they're integrating the iCasino technology into that was a part of my score as the backbone for all their initiatives. So my score acquisition in general, I think is a potentially promising acquisition for them. Ontario, which is the

largest province in Canada, just went live with sports betting. And my score is super popular there, which is, I think, a great match. That's probably why they made the acquisition at this time, because they could see that the legalization was coming. Ontario has, I think it's like the California or Texas of Canada, just a gigantic amount of people, at least relatively, you know, it's a smaller country. But executing on that region over the next two to three years will be crucial for the company to prove that the MyScore acquisition was worthwhile and getting sports betting popular and getting their market share in general, because it'll almost be, it's not going to be as big as, you know, Texas or California getting legalized, but it's pretty

darn close. So it's very important for them. I think that's something investors should watch out for over the next two to three years. All right, Ryan, did you have anything else to add on that contract? I'm struggling to find the terms here. Yeah, it's very complicated. If that's something you want to look into, they've got a lot of stuff in their SEC filings, but it's not really for audio format. All right, highlights and lowlights. Ian, what did you like and dislike about this business? I like the Barstool partnership. I think that acquisition was super smart and just brings brings the younger generation into um you know a world that that frankly i think the casino world and and a lot of the betting world is centered on the older

generation for a long time and now as everybody's trying to get into the tap into the younger generation i think partnering with barstool is a um was a great move um the low light the major low light for me i think is just it's heavily dependent on the regulatory environment and so depending on the timing of when states make, um, uh, sports betting legal or mobile sports betting legal or how they make it legal or how many, um, licenses they grant or who gets the partnerships with the different leagues or teams or all of those types of things, um, makes this just a little bit murkier. It's a little bit harder to understand exactly, um, a little less predictable because you just don't know exactly when all these, the legislation and regulation

is going to be approved and finalized and what the terms on that are necessarily going to be. Yeah, for me, the highlights are kind of the same as yours, Ian, which is I do think the Barstool brand allows them to acquire customers at a cheaper cost than the other sports betting companies, which is a pretty big deal given how many competitors are just plowing money at this.

and they really do they really broadcast pen definitely broadcasts how much cheaper their customer acquisition cost is than competitors um i also think they talk about it too much i'm like guys we know like it's every slide it's also like i don't know that's that's almost like a backhanded way to compliment yourself because you're also saying like they have money right now in this environment to just plow at acquiring the same customers that you're going after. Also, the advertising spend is just in the form of paying employees at a media company. It's still spend. Yeah. I do think, I also think the shift to digital betting, just broadly speaking, will be better for gross margins over time. I think that might reduce the barriers to entry

for casinos, but there might be some regulatory stuff in there that I don't quite understand. So I think those are probably the two biggest highlights for me. Lowlights, I don't like the way they hold analysts' hands during the conference calls. They basically gave them line by line what it should say in their models, which frustrates me just because like… That's not a real lowlight, is it? Well, to some extent, the fact that they're spending so much time trying to please analysts, like Enron did a lot of that too. Like, here's what your model should say. Here's how that should reflect what our stock is worth. Let them figure that out for themselves. You focus on allocating money where it's most necessary. I also don't like that sports betting is ultra competitive right now. So I guess I have like some real, I'm not sure who the winner is going to be. I don't know who like the permanent stalwarts are going to be, what the market share is going to look like in the end. or sort of 10 years from now. I also don't have very much visibility into the payback on some of

their acquisitions that they've made. I don't, it just kind of gets lumped into the interactive segment. So you kind of have to guess and they are an acquirer. So that's, I guess, important. And then I guess the last one, which is a personal low light, I have a terrible grasp, a terrible grasp on the regulatory landscape around the entire business. I don't know like how that gets if that happens if state legalization happens slower than most people are anticipating how does that affect pen um i don't know i guess that's just like i have a bunch of questions there that i don't have answers to yep gaming is our gambling not gaming gambling is a complicated industry all right i'll hit mine my score in barstool acquisitions that's

definitely the big juice here a lot of potential um i do like the durable tailwind that should be coming from sports betting legalization over the next decade however flip it to a low light we don't know exactly when that's all coming if texas and california never do it um i mean that's tough but it all likely it probably is coming over this next decade probably ubiquitous across north america um i also do like how they're moving towards vertical integration uh basically everything is in-house now, all the way from how they acquire customers with their media assets, which is MyScore and Barstool, and then they're trying to transition iCasino to their own products instead of the outsourcing stuff, which is very popular.

I like that because it gives them better margins over the long term and probably a more defensible position versus, say, someone that just has an app startup trying to come into the marketplace. Lowlights though, casino operations are messy. I don't know how to value them. I just think they're very complicated. I don't think they're that good of businesses, to be honest. We've talked a lot about the barstool and score and a lot of the media properties, but 85, maybe let's say 80% of their overall revenue still comes from land-based slot machines. Yeah. You're not buying barstool for 13 billion. that that's like hard to forecast i think like what whether that's going to be a growing business

especially coming off 2021 which they say i don't think it's a good i don't think it's a good business to be honest um well slot machines aren't bad businesses but yeah that's true that's true they're not great yeah um also they missed out on new york betting like the new york uh state betting license ceo says it was so bad it was really bad like not bad that uh they didn't get it but new york was bad because of the taxes were apparently super egregious i think it was like 50 so and no apparently no one's going to make money there um which is weird because they're doing insane promotions all the other competitors uh so maybe that's actually going to be a good thing because penn won't have to waste a bunch of money competing against caesars and mgm um but yeah

those are my low lights move to bull case ian what do you think you go right here yeah i think for pin national gaming to uh for the bull case that they become something and i kind of hate making some of these comparisons but they become the disney of the gambling world and they're able to have digital um digital gambling in-person gambling and this media company that's like supporting all of that and that they're able to generate more from each customer than their competitors in a similar way that disney is able to run content through its its uh cycle and just generate cash in a lot of different ways. I think if everything goes right, that's what pins building and has a way for them to generate money in a lot of different ways and bring people

into the funnel in a lot of different ways as well. Okay. Ryan. Yeah. I think Ian has a really good point that the new media properties just bring a lot of like options in terms of potential revenue generation. And I guess you could call it synergies. Like for example, I mean, right now they only have one, but they're installing all those sports bars, the barstool sports bars at their locations. That could bring people into the physical casinos as well. I think for this to be a really good investment, I think they need to see mid-single digit revenue growth from their locations and digital sports betting needs to become a much bigger part of their overall revenue um freak if they're able to generate free cash flow margins north of 10

and both those things happen i think they're going to be all right really i don't know you also i i'm struggling with the dilution here too essentially i'd say that if because it's hard to think about like if retail declines year over year and they have all this fantastic growth and online? How much is it going to offset enough to make this worthwhile at 17 times? If they did the common stock offering and bought my score at an inflated stock price and then buy back stock now, I would argue that's some pretty smart capital allocation, but yeah, the deletion is heavy. What's your bull case? I think it's very simple, although it requires a ton of execution, which is my score, barstool,

iCasino backend and land operations all come together nicely and have those synergies, you know, quote unquote. And this is kind of the sports and gambling giant doing a few billion in cashflow after debt payments, which is for anyone that doesn't know is what would be called levered free cashflow. That just means free cashflow while also including your interest payments. Yeah, but not all land operations are pretty stable, but not all these other ones are going to require execution and coming together. So it's going to take a lot, but the bull case is there and it could be worth, I mean, if everything goes right, it could be worth much, much more than it is. All right, Ian, let's move on to bear case. What do you think could go wrong

here? My bear case is that the other sports books move faster. There's too much competition. They're not able to gain a significant market share. Barstool potentially doesn't maintain the same popularity it has today. It doesn't grow in popularity. And so any of the omni-channel advantage that they had is lost and it just becomes a fight over the scraps in a commodity type business. All right, Ryan. Yeah. I think, like I said, I think they have to grow free cashflow per share at a double digit rate over the next five to seven years for this to be a better than market investment, which I do think is possible, but I think there's also the chance that they don't hit that.

And if they did, I think the three contributing factors would be first, they are perpetually spending a ton in order to sustain market share in the sports betting world. If they have to keep doing that, that's going to be,

that's going to pain them. Two, regulatory environment is what it's too slow moving. That would kind of restrict some of the growth that we think would come. And then the third one is, I have, I'm not even sure

what I put on here. A broad shift to online gambling hurts Penn's retail locations. Since the retail locations make up the lion's share of their revenue, if the shift to online happens and it doesn't help them, that could lag the top line for them. that's a good point it's a good point all right i have mine a few bear cases i think come to mind margin pressure never materializes we see with all the promotions and all that stuff they're spent on the media stuff uh there's it's hard to see what margins we're going to be because there's so many variables at play here um if states keep procrastinating legalized sports betting that's another way i think that they could really hit a stall in growth and then the synergy advantages erode away. And also, last one, everything can go right in a capital

structure, which just means their debt, operating leases, all that good stuff that they have to pay back. If that's where all the excess cash generation has to go, there's going to be not available for shareholders. And you want cash available to shareholders. I think, well, that's that's oversimplifying it but that's what you want all right more or less interested let's wrap things up ian what are your final thoughts on pet yeah i'd say i'm a little less interested and part of that's because i just tend to be less interested in the send stocks in general um and nothing against people who who do invest in them but it's just i just am less interested overall with these types of stocks i think the other piece of it for me is i i question i question

if they're going to be able to win i think they're in a good position if i was going to bet on any sports book ironically it might be it might be them but um but i don't know it's not it's just not something i'm super interested in yeah i think i agree i'm a little less interested it if i had to pick one company in the gambling space right now i assuming i guess valuation parity. So let's assume we're all at the same valuation. I'd probably bet on them, especially in the sports betting space, but I don't have to. So I probably won't pick any gambling company. And I would almost say it's outside my circle of competence in terms of knowing how much cash some of these gambling companies are going to generate in the upcoming five-year period.

like i really have a hard time telling yeah i guess it yeah i'm less yeah i'm less interested i think i'll keep it simple i think casinos are bad businesses or i don't maybe they're good businesses i just don't like them um and i think that the media access that they acquired while promising and growing quickly it's hard to identify where media companies have any sort of without any attachment to distribution um the reason espn was so dominant for so long it was because they had sports rights distribution and a lock on cable i mean barstool is just popular because they're good at their job i don't think that makes it investable just because they got we listened to their podcast like that stuff is not it's hard to find like the the

industry's durable, but it's, it's just like, okay, are you going to have these lightning rod, like talent people coming in every time? I mean, I don't know. That's just a concern for me. It just doesn't, that business is while done super well is fragile because it all relies on their talent. I also think it, I think a lot of people are overestimating barstools potential impact here. Like this really is if the retail locations struggle, no matter how much they talk about the sports betting like this is really going to hurt the top line yeah but it could the company could 10x in value uh not pen barstool because of the execution like the opportunity is there but i mean man that's a it's a long ways out yeah all right stock for next week ian's turn um what do you got

for us i think we'll take a look over at the streaming wars and check out viacom cbs i think there's a lot of i think you mean paramount global yeah i was gonna i was gonna say paramount global this is a tech company all right what what uh any reason just interesting yeah so there's been been some chatter about it on twitter and we've got and i know there's a lot of people who love it out there um but it had a little bit of a drop after earnings so i thought it was a reasonable time to take a look, see what's up with it. Yeah, that should be a fun one. Stream awards are always fun. All right. That's going to do it for this episode. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I

are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Before we turn it off, give us a review on Spotify or iTunes. It takes you five seconds. right on the show page we're almost 100 reviews almost 100 on spotify uh if we could see who the 100th reviewer was we could give you a prize of non um worth probably nothing but a share of chesapeake energy like like ramen it does but either way it's so simple if you like the show easiest way to support us give us a five star on spotify or itunes all right that's gonna do it We'll see you next week.