Penn National Stung by Dissenting Voice, Analyst Boldly Slaps Hot Stock With ‘Sell’ Rating

Posted on: June 8, 2020, 11:24h. 

Last updated on: June 8, 2020, 12:03h.

Penn National Gaming’s (NASDAQ:PENN) scintillating redemption story hit a stumbling block Monday, as an analyst tagged the gaming stock with a “sell” rating and a price forecast that implies significant downside from current levels.

Penn National Stock Rocked By Analyst Call
Barstool Sports founder David Portnoy is none-too-pleased with analyst Carlo Santarelli’s call on Penn National, which owns part of Barstool. (Image: Twitter)

In a note to clients today, Deutsche Bank analyst Carlo Santarelli pared his rating on shares of the Ameristar operator to “sell” from “hold,” while lifting his price target on the name to $22 from $12. An upward price estimate revision is usually a bullish sign. But in this case, Santarelli’s projection is 40 percent below where Penn stock closed on June 5.

The company will have a more challenging time, relative to peers, improving margins, given its prior margin disciplines and higher than peer blended gaming taxes, which have forced Penn, over time, to be leaner than most,” said the Deutsche Bank analyst.

Penn operates 41 casinos in 19 states, including some where gaming taxes are considered high, including Illinois and Pennsylvania. For example, the growth of sports betting is a big part of the Penn investment thesis. But in the Keystone State, operators pay a 36 percent levy on sports wagering activities.

Santarelli’s call on Penn earned a stinging rebuke from Barstool Sports founder David Portnoy, who posted an expletive-laced tirade on Twitter disagreeing with the analyst. Penn owns 36 percent of the sports media property.

Admittedly a Contrarian Call

While noting Penn stock is “stretched” on valuation and that near-term risk/reward prospects for the name are “skewed unfavorably,” Santarelli acknowledges the “sell” rating runs counter to current consensus on the gaming name.

“Further, we recognize with this call we are likely arguing against a bull case of sports betting and iCasino being a huge windfall for Penn National, which will have no near-term resolution,” said the analyst.

Even with a loss of almost four percent at this writing Monday, shares of Penn more than doubled over the past month and are up more than nine-fold from the March lows. Recently, the stock became beloved by Wall Street, with analysts fawning for the company’s sports betting and internet casino prospects.

Underscoring the point that with his “sell” grade and $22 price estimate, Santarelli is a lone wolf on Penn. He’s the only one of 14 analysts covering the stock with a bearish mark on the name, and his price call is well below the consensus average of almost $30. Ten of his 13 peers rate Penn the equivalent of “buy” or “strong buy.”

Not All Bad News

Santarelli also acknowledges that there is some risk in assigning a bearish mark to Penn at a time when the broader market is strong and investors are embracing “story” stocks.

“In our view, the biggest risk to our call is the near term and a rising equity market, which is embracing story/concept stocks,” he said.

Penn, while previously viewed as a brick-and-mortar casino operator, is now being seen through the lenses of sports wagering and online casinos, verticals that could each be worth $20 billion over the next several years.

Santarelli says Penn’s iGaming and sports betting business are worth $2.5 billion, or $18 a share.