Penn Downgraded as Analyst Sees Little Hope of Near-Term Sale

Posted on: June 25, 2024, 03:00h. 

Last updated on: June 26, 2024, 10:10h.

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

Shares of Penn Entertainment (NASDAQ: PENN) slumped Tuesday after an analyst downgraded the stock, in part citing long odds that the regional casino operator sells itself over the near term.

ESPN Bet Penn Entertainment sports betting
The ESPN Bet logo. Operator Penn Entertainment probably won’t sell itself over the near term. (Image: ESPN Bet)

In a note to clients on Tuesday, Raymond James RJ Milligan lowered Penn to “market perform” from “outperform” while setting a price target of $20 on the stock. That implies upside of about 8.1% from where the shares trade at this writing.

Given the path to profitability in digital still remains uncertain, and we don’t expect any dramatic shift in strategy (e.g., an outright sale of the company) in the near-term, we are recommending investors take profits and look for better risk-adjusted opportunities in the sector,” wrote Milligan.

The analyst’s commentary arrived just days after reports surfaced indicating that Boyd Gaming (NYSE: BYD) may be considering a takeover bid of more than $9 billion for Penn. Shares of Penn have rallied since late May when the Donerail Group, a major investor in the gaming company, sent a letter to the board of directors pushing for a sail.

Penn Waiting on ESPN Bet Football Uptick

In the wake of the Boyd rumor, the prevailing consensus among sell-side analysts is that it’s not surprising the Orleans operator might be interested in rival Penn, but that getting a deal completed is easier said than done.

Multiple reasons fortify that thesis, including Penn not yet signaling it’s open to a sale. Analysts believe the company might consider divesting some regional casinos, but a transaction for Penn in its entirety probably isn’t the near-term cards.

Additionally, Penn is viewed as wanting to evaluate the performance of its ESPN Bet mobile sports wagering application over a full football season — an opportunity presenting itself this year. The app debuted last November.

Among others, those moving parts are among the reasons Milligan encouraged clients to take profits in Penn and look for better risk-adjusted opportunities in the gaming space. Caesars Entertainment (NASDAQ: CZR) is Raymond James’ top pick.

ESPN Bet Could Loom Large in Deal for Penn

Penn’s commitment to ESPN Bet, which was heavily criticized by Donerail, could be a significant factor in a large-scale transaction and, potentially, the company’s ultimate decision to sell itself or continue as an independent entity.

Specific to Boyd, some analysts believe that owing to that operator’s 5% stake in FanDuel — the largest online sportsbook in the US — it would have no interest in ESPN Bet and would likely want Penn to find another buyer for that unit as part of a possible agreement to acquire the company’s land-based casinos.

Locating an acquirer for ESPN Bet could also be easier said than done due to Penn’s relationship with ESPN parent Walt Disney (NYSE: DIS) and ESPN Bet’s currently modest market share.