Penn Earnings: Nov. 14 ESPN Bet Launch in Focus, as Regional Competition Remains Intense

No-moat Penn’s PENN 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.

Total revenue was flat in the quarter, as 24% growth in the digital segment was offset by lasting competition in the South and West regions, which posted sales declines of 7% and 14%, respectively. We have already accounted for this in our 2023 forecast, but separately plan to lower our sales growth to 2%-3% from 4% to account for incremental economic growth pressures from ongoing inflation and exhausted consumer savings. We still expect solid 5% sales growth in 2024, aided by the company’s launch of its digital offering with ESPN later this month. We think the marriage of Penn’s in-house technology and ESPN’s media reach (comScore data shows ESPN’s unique fantasy sport users are multiples of Penn’s main competition) can achieve the company’s target 2027 EBITDA of $500 million to $1 billion, which aligns with our existing $651 million forecast ($388 million prior to the announcement of the partnership).

Total EBITDAR was down 6% in the quarter to a 27.5% margin, and while we still see physical casino margins around 36% in 2023, we plan to reduce our consolidated 26.9% forecast toward 26% for the full year because of higher near-term spend around the digital launch of ESPN Bet.

Although Penn’s debt/EBITDA was 8.4 times in 2022, it has no debt maturing until 2026, when just $331 million comes due, followed by another $923 million in 2027. In our view, any debt concerns are misguided, barring a severe and prolonged recession, as Penn has $1 billion in untapped credit, $1.3 billion in cash, and an estimated $2.7 billion in free cash flow to the firm generation during 2023-27.