Published on: November 13, 2024, 02:59h.
Last updated on: November 13, 2024, 02:59h.
Shares of Penn Entertainment (NASDAQ: PENN) experienced a decline today following a downgrade by Bank of America on the regional casino operator.
Analyst Shaun Kelley downgraded Penn to a “neutral” rating with a price target of $22, indicating limited upside potential from the current price level of $21. The downgrade was based on concerns that Penn’s margins may be affected in the near future due to increased competition in certain Midwest markets and Louisiana.
In regionals, we expect revenue and margin pressure from new supply to continue in 4Q and 2025 with acute impacts in Iowa/Council Bluffs, Illinois/Indiana (Joliet/East Chicago) and Louisiana (Bossier City) from casino openings, before getting a boost from $850M of capex opening in late ‘25 and ’26,” observed Kelley.
In Illinois, where Penn is the primary casino operator, the company is investing $360 million to transition its Hollywood riverboat casino in Aurora to a land-based facility. An additional $185 million is allocated to relocate a riverboat gaming vessel in Joliet. These investments are seen as crucial as the competition in the state is intensifying, leading some analysts to speculate about market saturation in the gaming sector.
Recent Downgrade Amid Strong Performance
Despite Bank of America’s downgrade, Penn’s stock has been performing exceptionally well lately. The shares have risen by 9.70% in the week following Election Day and nearly 14% over the past month, reducing the year-to-date loss to less than 19%.
However, the rapid gains in a short period are one of the reasons for the research firm viewing Penn’s risk-reward profile as “balanced” at present. Issues such as earning risks at regional casinos, high fixed costs, and market share challenges could impact the company’s positive outlook in the near future.
Furthermore, Penn’s debt load is increasing due to the aforementioned investments in regional casinos. Kelley estimates that the company’s leverage will rise to 6.3x next year, representing a 50% increase from 2021 levels.
On a positive note, the analyst mentioned that Penn is moving beyond peak leverage and losses, suggesting that the balance sheet could strengthen throughout next year and into 2026.
Concerns About ESPN Bet
Analysts and investors have long been critical of Penn’s ESPN Bet unit, citing concerns about its market performance. While there were indications of progress in the online sports betting business, Kelley disagrees, noting that ESPN Bet’s market share remains weak.
The analyst estimates that ESPN Bet has only a 3% market share in sports wagering and 2% in iGaming, significantly lower than Penn’s projections at the beginning of 2024.
However, Kelley acknowledged that ESPN Bet has made significant technological advancements in recent months, which could lead to improved customer acquisition and market share expansion.