Bank of America tags Penn Entertainment as a potential 'deep value turnaround' opportunity.
Stock of Penn Entertainment (NASDAQ: PENN) experienced slight rise in the early trading hours on Monday, opposing the downgrade given by Bank of America. The downgrade was a result of anxiety regarding the profitability of the company's ESPN Bet unit taking more time than expected.
In a note to clients, Bank of America analyst Shaun Kelley lowered the rating for Penn Entertainment from "buy" to "neutral" and reduced his predicted stock price from $28 to $17.50. This indicates potential return of 8.5% on the current share price. Kelley stated that the recent earnings of Penn were disappointing. Reflecting this sentiment, the company has had a 38% decrease in stock value this year. Kelley considers ESPN Bet as an issue.
Analyst Shaun Kelley feels that the high cost structure of ESPN Bet will increase the time necessary to grow and the potential risks in execution, even with lowered predictions. The service, which launched in November, sparked optimism that it would help Penn gain market traction in the ultra-competitive American sports betting industry and possibly become a fierce rival to larger companies. However, the outcomes haven't matched those expectations.
Market Share Struggles faced by Penn Entertainment, ESPN Bet
Aside from the challenges of low revenue and excessive expenses, Penn's ESPN Bet service faces the difficulty of low market share. Kelley predicts the app will control just 4% of the market in states where it's available, significantly less than the initial expectation of 10%.
While Penn is mainly known for its regional casinos, the steep amount it paid to Disney (NYSE: DIS) to use the ESPN label has led to investors scrutinizing the sports betting section of the business.
With share prices for Penn flirting with their lowest levels in nearly four years, Kelley re-evaluated his view on the stock as a "deep value turnaround" from a growth opportunity. This was highlighted by options market activity, which showed traders growing increasingly bearish against the gaming stock.
The options traders are more negative about PENN even though calls are exceeding puts. This can be seen in the equity's 50-day put/call volume ratio at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) which is higher than all readings over the past 12 months, Schaeffer's Investment Research reported.
ESPN Bet isn't the Only Issue for Penn
The ESPN Bet service is not the sole point of hesitance for analysts like Kelley and other investors with conservative views on Penn.
The gaming company is currently in the midst of an $800 million renovation effort that targets the M Resort in Henderson, Nev., the Hollywood Columbus in Ohio, and two Penn casinos in Illinois. Although advancing these properties could bring long-term benefits for Penn, the company could be confronted with a substantial debt burden to finance these initiatives.
Kelley assumes Penn's leverage will go up to 6.3x by next year, signifying a jump of approximately 50% from the levels seen in 2021.
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Source: www.casino.org
