Penn National Gaming Earns Morgan Stanley Upgrade

Posted on: April 25, 2022, 07:45h. 

Last updated on: April 25, 2022, 04:30h.

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

Following a brutal stretch that’s seen the stock shed 59.27% of its value over the past year, Penn National Gaming (NASDAQ:PENN) is drawing some praise on Wall Street.

Penn National
Penn National Gaming’s Hollywood Casino in Maryland. Morgan Stanley is bullish on the stock. (Image: The Business Journals)

In a note to clients today, Morgan Stanley analyst Thomas Allen upgrades shares of the regional casino operator to “overweight” from “market weight.” Allen is citing a compelling valuation opportunity. While Allen lowers his price target on Penn to $51 from $56, his new projection still implies upside of 40% from the April 22 close.

PENN’s recent underperformance coupled with better sports betting performance presents an opportunity,” writes Allen. “While PENN’s underperformance was somewhat warranted given more mixed recent earnings results and declining sports betting market share in key states like Michigan, Pennsylvania and Illinois, we have seen sports betting share stabilize in the US.”

Sports wagering was a catalyst for a massive run-up in Penn stock following the coronavirus market bottom in March 2020. That script flipped last year as the investment community applied more scrutiny to tough economics of the domestic sports wagering industry.

There are, however, some bright spots, as Penn’s theScore Bet unit is off to a solid start in Ontario, Canada, and Allen points out the operator’s Barstool Sportsbook brand in the US continues gaining customers.

Penn National Looks Cheap

Simply because the stock is down 29.51% year-to-date doesn’t make Penn inexpensive. But other data points indicate there is value to be had with shares.

“After significant underperformance, stock is trading at just 5.7x our 2023e earnings before interest, taxes, depreciation and amortization (EBITDA) for its core casino business, vs. 7.5x long-term average, if you assume its sports betting/iGaming business takes 6.75% NA share on an 11x multiple,” adds Allen.

The analyst estimates that Penn’s margins look conservative and that the operator’s mini-casinos in its home state of Pennsylvania are topping expectations. Citing recently reported state-level data, Allen sees an opportunity for the gaming company to beat first-quarter forecasts.

“While one quarter does not make a trend, the 1Q strength from a number of properties leads us to believe PENN is in a relatively good position to hit 2022 expectations, potentially more so than Boyd Gaming (NYSE:BYD), where regional properties where states have reported were 1% below our prior 1Q expectations,” adds the Morgan Stanley analyst.

Allen Lowers Targets on Slew of Other Casino Names

Speaking of Boyd Gaming, Allen downgraded that regional casino operator to “equal weight” from “overweight”, citing the stock’s relative outperforming peers this year. He says Penn offers more attractive risk/reward traits.

Las Vegas-based Boyd runs 28 gaming venues across 10 states, including 11 in its home city.

Boyd wasn’t alone in incurring some negative commentary from Allen. Citing rising interest rates, among other factors, the analyst pared price targets on Caesars Entertainment (NASDAQ:CZR), Las Vegas Sands (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN).