Is Penn National Gaming, Inc (NASDAQ: PENN) A Sell At Its Current Enterprise Multiple?


Penn National Gaming, Inc (NASDAQ: PENN), a consumer discretionary company with a market capitalization of $2.7 billion, currently trades at a Sales Multiple of 2.3x which is above the sector’s median multiple of 1.2x. Although this makes PENN look unattractive, investors may change their mind after reviewing the assumptions behind the EV / Sales ratio. In the post below, I calculate Penn National Gaming’s fair value using a Sales Multiples valuation.

How To Interpret Penn National Gaming’s Sales Multiple

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

EV / Sales, also known as Enterprise Value-to-Sales Multiple or a Sales Multiple, measures the dollars in Enterprise Value for each dollar of revenue. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. The general formula behind a Sales Multiples valuation model is the following:

Enterprise Value = Revenue x Selected Multiple

The EV / Sales ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Penn National Gaming’s EV / Sales ratio to its peer group that includes Boyd Gaming Corporation (NYSE: BYD), MGM Resorts International (NYSE: MGM), International Game Technology (NYSE: IGT) and Eldorado Resorts, Inc. (NASDAQ: ERI).

PENN Sales Multiple vs Peers Chartsource: Benchmarks: Sales Multiples

Since Penn National Gaming’s EV / Sales ratio of 2.3x is lower than the median of its peers (2.7x), it means that investors are paying less than they should for each dollar of PENN’s revenue. As such, our analysis shows that PENN represents an undervalued stock. Furthermore,’s EV / Sales Ratio Model calculates a fair value of $45.13 per share which implies 48.9% upside.

PENN EV / Sales Valuation Calculation

I selected a fair multiple of 2.7x in my analysis by averaging Penn National Gaming’s current EV / Sales ratio with its peer group.

Sales Multiple Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Penn National Gaming. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in EV / Sales ratios could be due to a variety of factors. For example, if you accidentally compare Penn National Gaming with higher growth companies, then its sales multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price. Furthermore, sales multiples are highly correlated with EBITDA margins so differences in profit margin often explain differences in valuation.

PENN revenue Growth and Margins vs Peers Tablesource: sales multiples model

Now if the second assumption does not hold true, Penn National Gaming’s lower multiple may be because firms in our peer group are being overvalued by the market.

What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in PENN. But keep in mind the EV / Sales ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Penn National Gaming by taking a look at the following:

Valuation Metrics: how much upside do shares of Penn National Gaming have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: how is Penn National Gaming’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Efficiency Metrics: is management becoming more or less efficient over time? Find out by analyzing the company’s asset turnover ratio which measures the dollars in revenue a company generates per dollar of assets.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: Valuation, financial statement analysis. Matt Hogan is also a co-founder of His expertise is in investment decision making. Prior to, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock. His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and Matt can be reached at or at +1 (516) 778-6257.

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