Penn Entertainment Stock Supported by Regional Casinos

Posted on: September 20, 2022, 02:42h. 

Last updated on: September 21, 2022, 02:26h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

As the parent company of Barstool Sportsbook and other digital gaming enterprises, Penn Entertainment (NASDAQ:PENN) is often discussed through the lens of online gaming. But one analyst encouraged investors to place more emphasis on the company’s land-based casinos.

Penn stock
The Barstool Sports logo on a NASCAR uniform. An analyst says regional casinos are catalysts for Penn stock. (Image: Bloomberg)

In a note to clients today, Stifel analyst Steven Wieczynski reiterated a “buy” rating on Penn stock with a $45 price target, implying 44% upside from current levels. The investment bank recently hosted Penn CEO Jay Snowden for a series of investor meetings, and the analyst came away encouraged by the chief executive’s commentary on third-quarter regional casino trends.

Regional gaming trends remain healthy across PENN’s broader portfolio, with management highlighting a robust Labor Day weekend and stable trends into early September,” wrote Wieczynski.

He acknowledges that Penn stock could be volatile in the near term because of increasing macroeconomic fears. But the risk/reward proposition offered by the shares is attractive. As for rising interest rates, persistently high inflation, and the specter of waning consumer spending, those could pinch the entire casino equity complex, not just Penn.

Penn Stock Not All About Sports Betting

Going back to 2020, when Penn acquired its initial stake in Barstool Sports, investors have often viewed the stock as a play on iGaming and online sports betting while ignoring the regional casino part of the equation.

Some of that is attributable to Barstool Sports founder David Portnoy being viewed, in some circles, as the face of Penn. The reality is he has no official executive role at the gaming company, and while internet casinos and sports betting are the “next big things” in the gaming industry, investors focusing on those drivers when it comes to Penn risk missing the value of the company’s cash flow-generating land-based casinos business.

“The majority of PENN’s customers live within a ~20-minute drive, limiting potential headwinds from elevated gas prices,” added Wieczynski. “The 65+ demographic is still yet to fully return, with average daily theoretical still ~20% off 2019A levels. Fifth and perhaps most importantly, management has a well-communicated plan to streamline operations in a potential recession, citing the ability to offset as much as 45% of theoretical revenue declines via cost cuts.”

The Pennsylvania-based company is the largest regional casino operator in the US and does not run land-based gaming properties outside this country. That’s a plus at a time when the dollar is strong and some competitors are grappling with ongoing COVID-19 protocols in Macau.

Penn Stock Points of Emphasis

On the other hand, it’s football season, and some investors are inclined to view Penn stock as a sports betting play. That scenario is heightened by the company’s exposure to Ontario, Canada — a market that thus far has disappointed operators and investors alike.

In more encouraging news, Penn’s promotional spending has long been rational relative to industry norms, and that precedent remains in place today. The company is also making investments in important regions to bolster market share.

“We believe PENN continues to invest aggressively in a handful of key markets (Ontario, KS, LA), with management reiterating their expectation for Q3 to be trough Adj. EBITDA losses before inflecting to Adj. EBITDA positive in Q4 (we sensed high conviction from management here),” concluded Wieczynski.