Penn Entertainment Now ‘Deep Value Turnaround’ Idea, Says BofA

Shares of Penn Entertainment (NASDAQ: PENN) traded slightly higher early Monday, fighting off a downgrade by Bank of America, which was stoked by concerns that the operator’s ESPN Bet unit could take longer than expected to become profitable.

In a note to clients, analyst Shaun Kelley downgraded Penn Entertainment to “neutral” from “buy” while slashing his price target on the stock to $17.50 from $28. That implies upside of 8.5% from current levels. Kelley deemed Penn’s first-quarter results disappointing. It appears market participants agree as the shares are off 38% year to date. In Kelley’s view, ESPN Bet is part of the problem.

We think ESPN Bet’s high-cost structure increases both the time to scale and execution risk, despite lowered guidance,” observed the analyst.

ESPN Bet debuted last November. At that time, there was optimism the refresh would help Penn win market share in the hyper-competitive US sports wagering landscape while potentially becoming a more credible threat to larger rivals. To date, that hasn’t played out.

Market Share Woes for Penn Entertainment, ESPN Bet

In addition to the dual headwinds of low revenue and elevated fixed costs, Penn’s ESPN Bet unit faces the specter of low market share. Kelley forecasts the app will command 4% of the market in the states in which it’s available, well below the 10% initially expected.

While Penn’s core competency is operating regional casinos, the hefty price the gaming company paid to Walt Disney (NYSE: DIS) for use of the ESPN brand has prompted investors to apply more scrutiny to the sports betting side of the business.

“Despite calls still outpacing puts, options traders are turning bearish toward PENN. This is per 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 stands higher than all readings from the past 12 months,” according to Schaeffer’s Investment Research.

ESPN Bet Not Only Problem for Penn

ESPN Bet isn’t the only point of concern for Kelley and other market observers who are less-than-enthusiastic on Penn.

Kelley estimates Penn’s leverage will climb to 6.3x next year, marking a roughly 50% jump from the levels seen in 2021.