Penn Earnings: Raising Fair Value Estimate for Penn Stock on ESPN Partnership

Penn Entertainment Stock at a Glance

• Fair Value Estimate: $29.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Penn Entertainment Earnings Update

We have raised our fair value estimate for Penn Entertainment PENN to $29 per share from $27 on expected higher digital revenue and EBITDAR due to its exclusive 10-year partnership with ESPN (with an option for another 10-year renewal). Shares were up 10%-15% on the announcement, leaving them fairly valued.

Penn’s in-house technology platform has changed its media partner for its online sports betting offering, shifting from Barstool to ESPN. We view this as a competitive upgrade, given ESPN’s more extensive consumer reach—nearly 400 million social media followers versus Barstool’s more than 100 million. Penn has sold Barstool back to its founder for an undisclosed amount (it purchased the asset for $551 million in 2019), and the social media platform will no longer compete in the online sports betting market. Moreover, if it is later sold, Penn has the right to receive 50% of the gross proceeds.

The cost of the ESPN partnership is $1.5 billion in cash payments to ESPN, paid over the next 10 years, along with $500 million in warrants. Penn also plans to spend roughly $150 million on marketing outside of ESPN and invest incrementally in promotions around the launch, which we think will push enduring profitability out about a year to the end of 2024. Penn expects the partnership to drive 2027 EBITDA of $500 million to $1 billion, which aligns with our forecast of $651 million (previously $388 million). We think Penn’s increased share opportunity is likely to come mostly at the expense of pure online competitors FanDuel and DraftKings, which lack the media and physical asset presence of Penn, MGM, and Caesars. The launch is expected to occur this fall.

Looking at earnings, quarterly and first-half 2023 revenue increased by 3% and 5%, respectively, with each month in the second quarter showing sequential improvement and tracking toward our 4%-5% full-year estimate.