Penn Entertainment Not Cheap, Pipeline Risks Linger, Says Analyst

Penn Entertainment (NASDAQ: PENN) stock isn’t particularly inexpensive relative to its peers, and the operator’s recently announced spending plans pose some risks.

Those are the sentiments of Roth Capital analyst Edward Engel, who, in a note to clients Tuesday, reiterated a “hold” rating on shares of the regional casino giant, with a 12-month price target of $33. That’s slightly below Tuesday’s closing handle of $33.39. Penn is planning a variety of new capital expenditures at casino hotels in the Midwest and Nevada, and some analysts question the wisdom of such moves at a time when the company’s leverage is of concern in the investment community.

In Illinois, where it’s the dominant casino operator, Penn is spending $360 million to bring its Hollywood riverboat casino in Aurora ashore. Another $185 million is allocated to bring a riverboat gaming vessel ashore in Joliet.

The operator also told investors it will spend $206 million to double the size of the M Resort in Henderson, Nevada. Following the recently completed sale of the Tropicana on the Strip, the M is Penn’s lone venue of note in the Las Vegas Valley. Penn is also directing about $100 million to add a 180-room hotel at the Hollywood Columbus in Ohio.

What Penn Needs to Do

Overall, Penn is spending $850 on various improvements across its regional casino portfolio. Engel says in order for those expenditures to pay off for investors, the operator needs to generate $115 million in earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR).

The sale-leaseback funding structure would also magnify cash-on-cash returns to high-teens. While $105M incremental EBITDAR would drive just 5% growth vs. Penn’s 2022E EBITDAR, the $90M EBITDA would drive 14% growth vs 2022E free cash flow,” wrote the analyst.

Engel notes Penn stock could be worth embracing ahead of that free cash flow acceleration. But that jump might not occur until the second half of 2025.

At the end of the third quarter, Penn had $1.7 billion in cash and cash equivalents and “traditional net debt” of $989.5 million, up $103.3 million from the prior quarter, according to a statement issued by the company. Lease-adjusted net leverage rose to 4.3x from 4.1x at the end of 2021.

Barstool Value Baked In

To Penn’s credit, its Barstool Sportsbook unit likely would be profitable in the current quarter if not for some unusually large exposure to the Houston Astros winning the World Series.

That’s a positive at a time when rival online sportsbook operators are closing in on profitability, but Penn’s shares are pricey relative to competitors, according to Engel.

“However, the stock will look more expensive in 2024 as development CapEx ramps. While some premium valuation is warranted for Penn interactive, we estimate PENN shares imply a ~2.5x EV/sales for Penn Interactive, which is a wide premium vs. DKNG’s 1.7x,” concluded the analyst.