Is Penn National Gaming the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Penn National Gaming (NAS: PENN) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Penn National Gaming.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

4.4%

Fail

 

1-Year Revenue Growth > 12%

13.1%

Pass

Margins

Gross Margin > 35%

41.1%

Pass

 

Net Margin > 15%

1.7%

Fail

Balance Sheet

Debt to Equity < 50%

108.8%

Fail

 

Current Ratio > 1.3

1.57

Pass

Opportunities

Return on Equity > 15%

1.2%

Fail

Valuation

Normalized P/E < 20

13.36

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

    
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With four points, Penn National Gaming isn't the big jackpot winner of our search for the perfect stock. The regional casino company looks a lot different from some of its international counterparts, but it's starting to benefit from improved conditions.

When investors think of casinos, their minds go across the Pacific to the high-growth Asian market, where giants like Las Vegas Sands (NYS: LVS) , Melco Crown (NAS: MPEL) , and Wynn Resorts (NAS: WYNN) have built new empires. By contrast, Penn's focus on the U.S. market is a lot less flashy, especially during recent years in which both Las Vegas and more local markets have struggled. Even as the tide turns domestically, companies like Penn still don't draw as much attention.

Penn has stood out from its domestic peers, though, posting much stronger returns for shareholders than competitors Boyd Gaming (NYS: BYD) , Ameristar Casinos (NAS: ASCA) , and Pinnacle Entertainment (NYS: PNK) . In its most recent quarter, Penn sported sales growth of 11%, which led to 27% higher adjusted EBITDA and analyst-topping earnings. The company's recent bargain pickup of M Resort in Las Vegas represents a coup that could push Penn closer to the big leagues.

Still, Penn has a lot of work to do to reach perfection. With razor-thin margins that don't match up to those of Wynn and Sands, Penn needs either to build volume or to find higher-margin ways to make money. If the economy cooperates, then Penn could easily make some progress in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click hereto add Penn National Gaming to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Ameristar Casinos. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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