Analyst ‘encouraged’ by Penn management

June 14, 2024 12:28 PM
Photo: Penn Entertainment (courtesy)
  • David McKee, CDC Gaming Reports
June 14, 2024 12:28 PM
  • David McKee, CDC Gaming Reports

Truist Securities analyst Barry Jonas met with Penn Entertainment executives this week and came away “generally encouraged” by their remarks and raised his price target from $23 per share to $25.

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The stock was trading at $19.05 at the time of his report.

Jonas stated that gross gaming revenues for Penn have been improving from a weak April (“mostly calendar-driven”). Still, he shaved a percentage point off his second-quarter projections out of “conservatism.”

The analyst kept his estimates for Penn’s controversial online assets unchanged. He did note that Penn shares had enjoyed a run-up “as activists have become more vocal,” particularly with regard to ESPN Bet.

Noting that Penn had missed estimates and lowered its revenue guidance twice in succession, Jonas opined that Penn management “is hyper-focused on meeting if not beating expectations—specifically Interactive.” He allowed that much was riding on upcoming football season but said that integration of ESPN Bet seemed to be on track.

Jonas said “we think the market is undervaluing the company.” He based this on successes by ESPN Bet, adding that he believed that Penn wasn’t being given much, if any, credit for its non-sports betting online operations.

“We believe ESPN Bet is on track to achieve key product milestones in time for football season,” Jonas said. “Among other features, this includes a revamped parlay product and base ESPN Fantasy app linking – a feature we think is very underappreciated.”

Referencing an April 1 survey, Jonas observed that 97 percent of its respondents bet on sports and frequented ESPN Bet’s mobile application. He added that 52 percent deemed it “likely” they would make ESPN Bet their primary application once it is fully integrated while 45 percent said it was “possible.”

Penn plans, Jonas said, “to release the full suite of ESPN’s channels as a standalone digital destination in 2025 – including seamless sports betting via ESPN Bet.” He saw the provider as integral to Disney’s direct-to-consumer strategy and was encouraged by Disney’s and Penn’s support for integration of the duo.

“While the market is hesitant to give PENN value for ESPN Bet today, we think the more integration work done ultimately drives more value to PENN,” Jonas prophesied. He said he was working from a basic assumption that Disney does not wish to get licensed for gaming and yet an integrated betting app was “a strategic priority” for the larger digital strategy of the Mouse House.

Turning to the subject of recent tax increases, Jonas opined that Illinois would not have any emulators before 2025. This was also the view of Penn execs and Illinois’ introduction of a graduated tax rate is expected to be favorable to their company.

“The tax increase is not a complete surprise given the history of [Illinois] as a frequent outlier with taxes and expansions,” Jonas wrote. He said it was too soon to say whether Penn would be opportunistic in the Land of Lincoln, leaning in to gain market share or not.

He added that Penn brass would be closely attuned to the market, seeing whether rivals adjust promotions or odds. Jonas noted that the tax shift would not affect Penn’s skin fees, as that is not applicable in Illinois.

As for the recent broadside by shareholder group Donerail blasting the ESPN Bet investment and Penn’s digital strategy, Jonas opined that it “also highlights the opportunity for value creation at PENN.” Specifically, this would be done by further monetizing the company’s terrestrial casino assets.

Jonas returned to his contention that Wall Street is ascribing no value to Penn’s i-gaming and other digital assets.

“Outside of ESPN Bet, we see underappreciated value for Hollywood iGaming, theScore Ontario (potentially boosted with Alberta discussing OSB/iGaming legalization) and PENN’s skin fees to other operators,” he wrote.

Allowing that unlocking the potential value of ESPN Bet was “not a given,” Jonas maintained that there was sizable upside to Penn stock, “well beyond what Donerail has outlined.”

He dismissed the idea of a near-term strategic review, saying that ESPN Bet had a “clear” road map before it, that football season was near and that high, volatile interest rates were discouraging merger-and-acquisition activity at present. “We also note PENN is one of the most efficient land-based operators in our coverage, which limits any low hanging operational synergies,” Jonas concluded.