Company Reports

No-moat Penn's shares moved 17% higher during May 31 trading, as the market cheered an activist letter from the Donerail Group, which has an investment in the casino operator. In Donerail's view, Penn's shares have underperformed peers due to the company's heavy investment in its interactive division, which Donerail complains has produced lackluster results to date. For this reason, Donerail believes Penn should relent from further capital outlays in its digital business and instead focus on its physical regional casino assets, which have produced steady results through various economic environments and could be worth $23-$30 per share assuming 2024 EBITDA multiples of 6.5 times-8 times.

Penn Entertainment has a leading omnichannel presence, which includes 43 physical casino assets, a digital portfolio encompassing an upgraded sports betting partnership with ESPN that launched in November 2023, iGaming, media, and a loyalty membership base of over 30 million. We estimate Penn held around a high-single-digit percentage revenue share of the $66.5 billion domestic commercial casino gaming market in 2023.

No-moat Penn shares fell 8% during May 2 trading, as the company’s first-quarter digital business (13% of total revenue) was impacted by lower hold (house unlucky) and user monetization. We expect the fortunes of the digital segment to improve, as hold has already normalized in April, Penn improves monetization of its solid user share with parlay wagers and increased integration of the ESPN franchise this Fall, and the company launches a dedicated iGaming app in early 2025. Thus, we still expect modest US sports betting and iGaming revenue share gains over the next few years for Penn but plan to lower our 2024 digital revenue growth forecast to around 50% from our preprint 80%. As a result, we expect to reduce our $24 fair value estimate by around $2 per share, leaving shares undervalued.

Pennsylvania and Michigan released sports wagering and revenue data through February, including individual operator performance. The data supports our view that no-moat Penn is grabbing share at the hands of no-moat peers MGM and Caesars, while no-moat DraftKings adds to its leading position due to first mover and technology advantages. In fact, since launching ESPNBet in November, Penn has averaged a 4- and 7-percentage-point sports revenue share improvement over the prior year in Pennsylvania and Michigan, respectively, reaching a high-single-digit share of both markets and aligning with our forecast. Meanwhile, MGM’s share over the same time is lower by 3 and 5 percentage points; Caesars’ is flat and down 3 percentage points; and smaller competitors are collectively lower by 3 and 3 percentage points. Conversely, DraftKings’ share is up 7 and 11 percentage points.

Penn Entertainment holds a leading omnichannel presence, which includes 43 physical casino assets, a digital portfolio encompassing an upgraded sports betting partnership with ESPN that launched Nov. 14, 2023, iGaming, media, and a loyalty membership base of over 29 million. As a result, we estimate Penn held around a 10% revenue share of the $66.5 billion domestic commercial casino gaming market in 2023.

Penn shares lost 14% of their value after fourth-quarter results showed far higher promotional spending for its interactive sports betting and iGaming business. While we expect some promotional activity around the launch of sports betting in North Carolina in March and New York later this year, we still estimate Penn’s interactive segment will produce a low-20% adjusted EBITDA margin by the end of this decade. This near-term expense and more tempered interactive market share assumptions over the intermediate term due to persistent competition drive our planned high-single-digit percentage reduction in our $27 fair value estimate. While shares might remain volatile in the near term, we see value for long-term-oriented investors.

Penn Entertainment holds a leading omnichannel presence, which includes 43 physical casino assets, a digital portfolio encompassing an upgraded sports betting partnership with ESPN launching Nov. 14, 2023, iGaming, media, and a loyalty membership base of 27 million. As a result, we estimate Penn holds around a low-double-digit revenue share of the $60 billion domestic commercial casino gaming market.

No-moat Penn's shares popped 15% from oversold conditions as investors eagerly await the Nov. 14 launch of ESPN Bet. We plan to lower our $29 fair value estimate by around $2 to account for largely near-term investments behind the ESPN partnership. We view shares as undervalued and think investors have too much angst over the company's debt position, which we view as manageable.

We have raised our fair value estimate on no-moat Penn to $29 per share from $27 on expected higher digital revenue and EBITDAR due to an exclusive 10-year partnership with ESPN (with another 10-year renewal option). Shares were up 10%-15% on the announcement, leaving them fairly valued.

Penn Entertainment holds a leading omnichannel presence, which includes 43 physical casino assets, a digital portfolio encompassing an upgraded sports betting partnership with ESPN launching in the fall of 2023, iGaming, media, and a loyalty membership base of 27 million. As a result, we estimate Penn holds around a low-double-digit revenue share of the $60 billion domestic commercial casino gaming market.

We have initiated coverage on Penn Entertainment with a $27 fair value estimate (a 10% discount to trading levels) and no-moat rating. In our view, Penn’s attractive omnichannel presence positions it well in the domestic gaming landscape, where we estimate it to have held 11% of the commercial market in 2022. The firm’s portfolio includes over 40 casinos across the U.S., which combined produced healthy EBITDAR margins of 36.7% and represented 90% of total sales in 2022. In turn, we believe these brick-and-mortar locations help Penn receive digital gaming licenses, some of which it awards to third-party partners, driving a growing interactive business. Also, the firm’s acquisitions of Barstool in 2020 and theScore in 2021, along with its Penn Play loyalty membership of 27 million individuals, add demand channels and technology resources, aiding its growing digital business. As a result, we expect Penn’s interactive segment to grow to about 25% of total sales in 2027 from 10% in 2022 and for EBITDAR margins in the division to reach 20% in five years, compared with negative 11% last year.

Penn Entertainment holds a leading omnichannel presence, which includes 43 physical casino assets, a digital portfolio encompassing sports betting, iGaming, and media, and a loyalty membership base of 27 million. As a result, we estimate Penn holds around a low-double-digit revenue share of the $60 billion domestic commercial casino gaming market.

Penn National Gaming PENN reported fourth-quarter results that met consensus on the top line, but were below consensus for EBITDA. Revenue increased 7.3% to $676.5 million (in line with consensus of $676.5 million) and adjusted EBITDA increased 17.8% to $156.5 million (below consensus of $162.8 million). Management provided guidance for 2012 revenue of $2.79 million (below consensus of $2.953 million) and 2012 EBITDA of $729.6 million (below consensus of $735 million). There is no change to our $37 fair value estimate based on the fourth-quarter results, and view the shares as moderately overvalued and unattractive due to concerns pertaining to intensifying competition in the regional gaming industry.

Penn National Gaming PENN reported third-quarter results that met our expectations and consensus estimates, and management revised upward its outlook for 2011. Management also indicated that that it expected earnings to be flat in 2012, due to cannibalization of existing properties by new Penn casinos and increased competition, which led to a more than 5% decrease in the stock. As our financial model already assumed flat earnings around $2.32 per share in 2012 due to cannibalization and increased competition, our fair value estimate of $37 remains unchanged. We currently view Penn as fairly valued and would not be buyers of the stock due to our negative outlook for increased competition to lead to a decline in sales at a number of Penn's existing properties.

During the 17-year span between 1990 and 2007, when the regional gaming industry grew from less than $1 billion in revenue to more than $16 billion, Penn National Gaming transformed itself from a small operator of horse race tracks in Pennsylvania into the second-largest operator of regional casinos in the country, with sales over $2 billion. Penn was one of the pioneers of "racinos," or hybrid gaming emporiums that combine casinos with horse racing operations. While Penn has the strongest pipeline of properties under development among regional casino operators, industry growth has slowed, and the industry is becoming increasingly saturated and cyclical in nature. Penn has no economic moat, and its existing casinos face intensifying competition from new casinos opening in states that already have legalized casino gambling, and new competition from states looking to expand into casino gambling. We expect the firm's existing properties to experience a near double-digit decline in revenue and cash flow the next two years. We do not think the market has fully recognized the level of intensifying competition Penn faces, and we view shares of Penn as fairly valued.

Penn National Gaming PENN announced second-quarter revenue and EBITDA growth of 15% and 33%, respectively, slightly ahead of our expectations. Growth was driven by the introduction of table games at two casinos, the acquisition of M Resort casino in Las Vegas, and the opening of a new casino in Maryland. These benefits were partially offset by a flood-driven revenue decline at a casino in Mississippi. We expect Penn to continue to post strong results the remainder of this year, and in 2012, due to its strong new project pipeline, which also includes a casino set to open at the Kansas Speedway in the first quarter of 2012, and two casinos in Ohio set to open in 2012.

Penn National Gaming operates regional casinos and racinos. During the 17-year span between 1990 and 2007, when the regional gaming industry grew from under $1 billion in revenue to over $16 billion, the company transformed itself from a small operator of horse race tracks in Pennsylvania into the second-largest operator of regional casinos in the country, with sales over $2 billion. Penn was one of the pioneers of "racinos," or hybrid gaming emporiums which combine casino operations with horse racing operations. While Penn has the strongest pipeline of properties under development among regional casino operators, industry growth has slowed, and the industry is becoming increasingly saturated and cyclical in nature. Penn has no economic moat, and its existing casinos face intensifying competition from new casinos opening in states that have already legalized casino gambling, and new competition from states looking to expand into casino gambling. We expect the firm's existing properties to experience a near double-digit decline in revenue and cash flow the next two years. We do not think the market has fully recognized the level of intensifying competition Penn faces, and we view shares of Penn as modestly overvalued.

The Illinois Assembly passed a bill this week that, if signed into law by Gov. Pat Quinn, will authorize five new casinos in Illinois--including downtown Chicago and its south suburbs--and slot machines at Midway and O'Hare airports. A key difference between this bill and other states' bills passed into law in recent years is that the Chicago casino would be run by the city.

Penn National Gaming operates regional casinos and racinos. During the 17-year span between 1990 and 2007, when the regional gaming industry grew from under $1 billion in revenue to over $16 billion, the company transformed itself from a small operator of horse race tracks in Pennsylvania into the second-largest operator of regional casinos in the country, with sales over $2 billion. Penn was one of the pioneers of "racinos," or hybrid gaming emporiums which combine casino operations with horse racing operations. While Penn has the strongest pipeline of properties under development among regional casino operators, industry growth has slowed, and is becoming increasingly saturated and cyclical in nature. Penn's narrow economic moat is weakening, as its existing casinos face intensifying competition from new casinos opening in states that have already legalized casino gambling, and new competition from states looking to expand into casino gambling. We expect the firm's existing properties to experience a near double-digit decline in revenue and cash flow the next two years. We do not think the market has fully recognized the level of intensifying competition Penn faces, and we view shares of Penn as modestly overvalued.

Penn National Gaming PENN reported first-quarter results that were slightly above consensus estimates. Revenue increased 12.6% to $667 million, and adjusted EBITDA increased 19.6%. Adjusted EBITDA margins were 26.7% for the quarter, compared with 25.5% in 2010, as the company benefited from a leveraging of its fixed cost structure. However, the increases in revenue and EBITDA were driven entirely by the opening of a new Hollywood Casino in Perryville, Md., which opened in the third quarter of 2010, and by the expansion into table games at the company's Charles Town racino and Penn National racino. Revenue at the other properties declined 0.2%, with EBITDA increasing only 3%. Given the continued weak same-location sales growth in the quarter, excluding the impact of the introduction of table games at two properties, and our view that the company will experience significantly intensified competition in the next several years, we are placing Penn under review to reassess the assumptions in our financial model and transfer coverage to another analyst.