Analyst Lowers Rating for Penn as They See Slim Chances of a Near-Term Acquisition
Stock of Penn Entertainment (NASDAQ: PENN) took a hit Tuesday following a downgrade by an analyst, who cited unknown chances of a quick sale for the regional casino operator.
In a report to clients today, Raymond James' RJ Milligan dropped Penn to "market neutral" from "optimistic", setting a $20 price target on the stock. This indicates a potential 8.1% increase from its current trading value.
Given the unclear path to profitability in the digital sector and the lack of a drastic strategy shift (e.g., selling the entire company) in the short term, Milligan suggested investors cash out and seek better risk-balanced opportunities in the sector.
The analyst's remarks surfaced just after whispers of Boyd Gaming (NYSE: BYD) contemplating a $9 billion takeover surfaced. Penn's shares have climbed since late May when the Donerail Group — a significant gaming company investor — penned a letter to the board advocating for a sale.
Penn Awaits ESPN Bet Football Boost
Following the Boyd rumor, analysts believe it's plausible the Orleans operator could be drawn to Penn, but executing a deal is more talk than action.
Several factors contribute to this, such as Penn not showing any indications of a sale yet. Analysts speculate the company may contemplate unloading some regional casinos, but a buyout of Penn in toto seems unlikely in the near future.
Additionally, Penn is believed to be keen on evaluating the performance of its ESPN Bet mobile sports betting app during a full football season — a potential this year. The app debuted in November of last year.
As other factors, these are among the reasons Milligan advised clients to withdraw from Penn and find better risk-balanced opportunities in the gaming industry. Caesars Entertainment (NASDAQ: CZR) is Raymond James' top pick.
ESPN Bet Could Play a Role in Penn's Deal
Penn's devotion to ESPN Bet, which Donerail criticized, could be a critical factor in a large-scale transaction and, possibly, the company's final decision to sell or continue as an independent entity.
For Boyd specifically, some analysts opine that due to its 5% stake in FanDuel — the leading online sportsbook in the US — it would have no interest in ESPN Bet and would likely encourage Penn to find another buyer for that unit as part of a potential deal to acquire the land-based casinos.
Finding a buyer for ESPN Bet could also prove challenging because of Penn's connection to ESPN parent Walt Disney (NYSE: DIS) and ESPN Bet's current minimal market share.
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