Penn Entertainment Downgraded, Analyst Cites Valuation

Posted on: April 17, 2023, 01:15h. 

Last updated on: April 18, 2023, 12:33h.

Shares of Penn Entertainment (NASDAQ: PENN) traded lower Monday after an analyst downgraded the stock, noting it’s fairly valued at current levels.

Penn activist
A slide from a Penn Entertainment investor presentation. An analyst downgraded the shares on Monday, citing valuation concerns. (Image: Penn Entertainment)

In a note to clients on Monday, JMP Securities analyst Jordan Bender downgraded shares of the regional casino operator to “market perform” from “market outperform,” pointing out the stock is “fairly valued” following a lengthy run of lagging its peer group. Penn stock is down 4.33% year to date and lost a quarter of its value over the past 12 months.

Trading at 6.3x earnings before interest, taxes, depreciation, and amortization (EBITDA)/11% free cash flow, we find shares of fairly valued and are downgrading our rating to Market Perform from Market Outperform,” wrote Bender.

The analyst added the “risk-reward is more favorable in other companies” in his coverage universe.

Penn Entertainment Pluses, Minuses

In February, Penn unveiled 2023 guidance of revenue of $6.15 billion to $6.58 billion, and adjusted EBITDAR of $1.875 billion to $2.0 billion.

Additionally, its Barstool Sportsbook unit notched a modest profit in the fourth quarter, something plenty of rivals have yet to accomplish. While the stock has struggled of late, the gaming company is a dedicated buyer of its own shares, and is in the midst of a $750 million repurchase plan. Still, JMP’s Bender sees some risks tied to the name.

“The integration of the in-house technology stack in the US will be a positive step for its online business, but will not be enough to offset the market share decline and valuation re-rate moving forward,” Bender observed. “While we acknowledge the underperformance in the last year vs. the SP500, we find more attractive risk-reward in other areas of the gaming sector with growth projects, online exposure, and capital return programs.”

Penn Entertainment reports first-quarter earnings on May 4. That report could include updates on Barstool Sportsbook performance, among other tidbits that analysts and investors widely follow.

Preference for Churchill Downs

As noted above, Bender sees better risk/reward opportunities in his coverage space than Penn Entertainment. One of those ideas is Churchill Downs (NASDAQ: CHDN).

Just weeks before the Kentucky Derby, Bender bumped his price target on that gaming stock to $298 from $278 while reiterating an “outperform” rating on the shares. The new price forecast implies upside of 16.4% from the April 14 close.

Bender noted the first quarter was a positive stretch for land-based gaming in North America. He sees sports betting in the region growing at a compound annual rate of 20% over the next five years, with iGaming posting a compound annual growth rate of 19% over the same period. Those are potential positives for shares of Churchill Downs.

That stock is up 20.35% year to date and resides just 3.66% off its 52-week high.