Penn Entertainment Sentiment Might Not Get Much Worse

Posted on: June 9, 2023, 05:00h. 

Last updated on: June 12, 2023, 01:21h.

While casino stocks, including those of some regional operators, are performing admirably in 2023, the opposite is true of Penn Entertainment (NASDAQ: PENN).

Penn activist
A slide from a Penn Entertainment investor presentation. An analyst says the worst may be behind the battered stock. (Image: Penn Entertainment)

Shares of the largest regional casino operator are down 11.78% year-to-date, while rivals including Boyd Gaming (NYSE: BYD) and Red Rock Resorts (NASDAQ: RRR) are up an average of 24%. Sentiment surrounding Penn is dismal, but it’s possible it can’t get any worse, potentially paving the way for a mini-rebound by the beleaguered stock.

In a new report to clients, Stifel analyst Steven Wieczynski noted investors may be pricing in worst case scenarios with Penn stock that might not materialize.

At this point, we believe investors are pricing in not only a meaningful slowdown in the regional gaming consumer, but also effectively zero (if not negative) credit for their Interactive business,” wrote the analyst.

He has a “hold” rating on the stock with a $32 price target, implying potential upside of 22.13% from today’s close.

Points in Favor of Penn

Penn has been beset by multiple headwinds, including controversies tied to Barstool Sports founder David Portnoy and his future at the gaming company, investors speculating that there’s next to no value in the company’s digital business, and that consumers are poised to dial back visits to regional casinos.

The last point is crucial, because land-based casinos are Penn’s core business. While the operator’s stock performance doesn’t reflect it, other data points indicate visitation to regional casinos remains strong, and previous fears of a recession appear to be overblown. The May jobs report confirms as much. Those factors and more could spark renewed interest in Penn shares — something Wieczynski says is happening on an incremental basis.

“We would also highlight that our call volumes on PENN have increased materially over the last month, which could be a signal that current trading levels are finally starting to screen attractive for certain investor groups,” observed the analyst. “First, seems like there is little evidence that the regional gaming consumer is pulling back.”

Wieczynski added that another point in favor of Penn is that the operator is significantly less dependent on lower income patrons — the ones most likely to reduce spending and visitation during a recession — than it has been in years past. That could indicate its client base is better positioned to weather an economic downturn.

Penn Stock Is Cheap

If market participants aren’t convinced by the aforementioned factors, perhaps Penn’s rock-bottom valuation could be appealing.

“Management still sees 2023 guidance as conservative should current demand levels remain steady,” concludes Wieczynski. “Ultimately, we remain attracted to PENN’s FCF generation and believe that with a long enough horizon, current trading levels present an attractive entry point. With shares now trading ~6x earnings, we believe this is a name investors should be watching.”

Point is with headwinds already priced into the stock, Penn may be too cheap for some investors to ignore at current levels.