After soaring about 20 percent in the two days following the announcement that it’s taking a 36 percent stake in Barstool Sports, Penn National Gaming (NASDAQ:PENN) was probably due for a pullback. That retrenchment arrived Friday, as the shares slipped 3.37 percent on volume that was more than double the daily average.
A weak day for the broader market and an analyst downgrade were the likely culprits behind Penn’s slump today. Deutsche Bank analyst Carlo Santarelli downgraded the regional gaming stock to “hold” from “buy,” noting that company could be a few years away from its sports betting business having a credible impact on results.
Our downgrade is not an indictment of the Barstool deal, a deal we think was a smart strategic customer acquisition play, nor is it reflective of a change in our view of regional gaming trends,” said Santarelli in a note provided to Casino.org. “We merely believe shares have moved too much too fast and when sentiment shifts, the market is likely to realize PENN is several years from the sports book vertical making material contributions to the P&L.”
Ending almost three weeks of speculation, Penn confirmed Wednesday it’s shelling out $163 million in cash and equity to buy a 36 percent slice of David Portnoy’s Barstool Sports, valuing the sports media entity at $450 million. In three years, Penn can pay another $62 million to boost its position to 50 percent, potentially paving the way for the operator to take full control of Portnoy’s company.
It’s hard to ignore the two-day pop in Penn equity on the heels of the Barstool announcement. But some analysts have urged caution in the wake of the deal, noting, as Santarelli does, that sports betting providing a real lift to the company’s results is a multi-year, not a near-term, process.
“We get the rush to want to quantify the impact of the transaction on PENN equity. But the reality is, the move in shares of late is one we believe to be driven predominantly by blue sky sentiment, retail investment, and short covering,” said the Deutsche Bank analyst.
While noting the industry is still in its nascent stages in the US, Santarelli points out that the notion of profitability running large-scale domestic sportsbooks isn’t yet proven.
Recent reports suggest that the average age of a Penn National customer is around 50, but the bulk of Barstool’s 66 million users, dubbed “stoolies,” are in the highly prized 18-35 range, potentially positioning the gaming company to refresh itself, demographically speaking.
Even at $225 million for 50 percent of Barstool, Penn realizes the benefit of converting what likely would have been a future acquisition cost into an asset today. Santarelli estimates the company is paying a reasonable $400 per paid user based on a conversion rate of 560,000 “stoolies.”
Going forward, the issue for operators is just how large the US sports betting becomes. Morgan Stanley says it could be worth $7 billion by 2025, the mid point of Penn’s $6 billion to $8 billion.
Assuming a compound annual growth rate of 15 percent for each new state that joins the party, Santarelli’s ex-Nevada forecast is $5.5 billion by 2023.