The stock is relatively buoyant after the Wells Fargo upgrade. The effect is not that huge because the stock has already done well over the last one year. It is up nearly 40% during the past 52 weeks. The trend has been strong even if one considers the price movement over the last two years. The stock has appreciated by nearly 90% during the period. The note by Wells Fargo is optimistic about the prospects of Penn. The analysts advise the investors to put in money in the stock. They consider the stock to be undervalued because of an overly pessimistic industry view, confusion over how to value PENN post the spin-off, and a misconception that the company's cash flows are now significantly more volatile than its peers. Also, the current valuations overlook its options to create value through unit growth supported by its balance sheet and strong FCF. The analysts believe that the estimates and industry trends are expected to stabilize next year because of the limited supply growth until 2016 and 'well known risks in the Midwest'. They have upped the price target from $15-$16 to $16-$18. The stock is surely lower on valuations compared to the peers, especially if one considers that the company is profitable on a net basis. The entire industry is highly leveraged as it depends on capital investments for acquiring real estate etc. It also needs funds for acquisitions in emerging segments. Social casino has seen some activity with company's like Caesar (CZR) and MGT Capital Investments (MGT) making acquisition to gain access to this fast growing segment. Leverage puts pressure on the net margins, hence Penn should keep a watch to ensure that debt remains within reasonable limits. Further, the recent rise in the stock has made it a bit vulnerable to profit booking in case of slippages.
