• Healthy FCF yields of close to 20% per annum.
• Equity accretive share buybacks and deleveraging.
• Underappreciated opportunities in sports betting post PASPA repeal.
• Share price catalysts include share buyback, positive news flow on regulations and accretive M&A.
• Re-rating back to historical levels yields 52% upside.

Penn National Gaming (PENN) is one of the more attractive investment opportunities available in the market today, primarily because I think the market is underappreciating its FCF-generating capabilities. A ~7x EV/EBITDAR valuation, in line with where shares have traded historically, suggests 52% upside from current share price levels, with near-term catalysts such as share buybacks and accretive expansions, either from new segments such as sports betting and iGaming, or from M&A. In the medium to longer term, the Company's continued efforts to clean up its balance sheet and growth initiatives should result in further upside.

Don’t ignore the free cash flow yield

Over the past years, PENN has increasingly diversified its portfolio of regional assets, including the recently completed acquisition of Greektown Casino-Hotel’s operations. These acquisitions have helped PENN diversify its geographical footprint and cope with unforeseen one-off events, such as the Midwestern floods that closed several of its casinos in 2Q and Hurricane Barry in July.

PENN also expects to realize synergies from the acquisitions. Management in the recent 2Q earnings announcement has revised its cost synergies guidancefor the Pinnacle Entertainment, Inc. (PNK) acquisition to $120 million by YE2020, up from $115 million previously. Revenue synergies from combining PENN’s and PNK’s player loyalty programs onto the relaunched "mychoice"program could also generate incremental adjusted EBITDAR in the range of $15-$20 million in 2020 and 2021. The overall 2019 guidance was also increased to include the impact from the Greektown acquisition.

The regional gaming landscape is also favorable, with promotional environment largely rational and low single-digit top line growth. Management admitted so in the 2Q earnings call, with Jay Snowden (President and COO) stating that the trends are very consistent with 2018, which was low single-digit same-store sales growth and very healthy EBITDA flow-through. Management also added that visitation continues to be strong at the high end and unrated segments and the company continues to refine its marketing strategies for the lower-worth segments to whittle down unprofitable visits to high-single digits from 15% currently.