Penn Top Choice Among Regional Casino Stocks, Churchill Could Sell Regional Unit

For casino stocks, second-quarter earnings season kicks off in earnest next week. Penn Entertainment (NASDAQ: PENN) takes its turn in the earnings confessional on Thursday, Aug. 6, and ahead of that report, one research firm anointed the stock one of its top ideas in the space.

In a new report to clients, Citizens Equity Research analyst Jordan Bender examines regional casino stocks, noting the Ameristar operator, which is already among this year’s best-performing names in the group, may have more upside ahead of it.

He  reiterated a “market outperform” rating on Penn while lifting his price target to $26 from $24, implying upside of 23.2% from where the shares trade at this writing.

Regional Casino Stocks ‘Overly Penalized’ Amid Macro Uncertainty

Shares of Penn are higher by nearly 43% year-to-date, but the stock is off almost 5% over the past month, joining peers to the downside in a scenario Bender characterizes as “over penalization” at the hands of macroeconomic concerns, namely in the form of high gas prices.

Elevated energy costs are a relevant factor in evaluating regional casino stocks because operators such as Penn rely heavily on patrons driving to gaming venues. However, there’s little evidence of earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) and gross gaming revenue (GGR) erosion due to macro headwinds. If anything, Penn’s core client base is proving resilient.

Consumer sturdiness could pay dividends for Penn because the operator recently wrapped up $360 million in spending in Illinois, one of its marquee markets, as well as putting the finishing touches on the $100 million hotel tower at the Hollywood Casino Columbus in Ohio. Some data points indicate the Illinois enhancements are already paying off in what is a competitive market.

Keep an Eye on Churchill Downs

Churchill Downs (NASDAQ: CHDN) joins Penn and Red Rock Resorts (NASDAQ: RRR) as Citizens’ preferred ideas among regional casino stocks, but the thesis differs somewhat relative to the research firm’s outlook on Penn.

“Catalysts include electronic table games, expansion of Derby Week, and a potential sale of its regional gaming business,” Bender said of Churchill Downs.

In the wake of increased consolidation activity involving Las Vegas Strip operators, there’s been chatter that regional operators could join the party in some fashion with some of that speculation centering on Churchill Downs potentially selling what’s been described as a “slow growth” regional casino unit, but the company hasn’t said such a transaction is in the works.