On Wednesday night, Deutsche Bank analyst Carlo Santarelli tied on the feed bag with Penn Entertainment CEO Jay Snowden and other top company executives. While brick-and-mortar casinos were discussed, the hot topic was ESPN Bet.
Santarelli described the newcomer to sports betting as “fairly solid,” in spite of unfavorable investor commentary due to losses in the fourth quarter of 2023. Those setbacks included registrations and the promotional outlays associated with them, as well as adverse game outcomes, which negatively impacted hold. Santarelli wrote, “This topic has been largely muted in the discussion around the performance in the period.”
At present, ESPN Bet enjoys roughly an eight percent market share. That could change with next week’s entry by North Carolina into online sports betting (OSB), which will be ESPN Bet’s first entry in a state where it enjoys a level playing field with other competitors, rather than playing catch-up.
Should ESPN Bet enter the Tarheel State with 10 percent market share, Santarelli believed this would change investors’ feelings about the OSB provider: “The logical conclusion would likely be that other states will eventually migrate toward this level.”
Why should ESPN Bet be more competitive in North Carolina than in other states? Santarelli believed that its parlay offerings would rival the best, ESPN Fantasy would now be integrated into the database, and ESPN itself would have a “more robust” app linkage to ESPN Bet.
“We believe each of these enhancements will be in place ahead of football season, while the launch in New York, which we believe could also boost share in neighboring states, is also slated for prior to the football season,” Santarelli added.
On top of these seemingly positive developments, the analyst noted, Penn’s interactive division will soon have a new leader. While not naming any names, Santarelli conjectured that it would be someone with “a deep background in engineering and product technology.”
Penn is predicting it will halve 4Q23’s deep interactive losses, which would mean red ink in the amount of just $160 million to $170 million, even taking an adverse Super Bowl result into account. “As such, while March Madness can surely provide for some volatility, we believe management has a much better handle on expectations for the 1Q24 than it had when trying to handicap the mid-November, 17-state, ESPN Bet launch.”
Santarelli reported that Penn was diminishing ESPN Bet promotional activity, down to three to five percent of handle. In spite of this, the company was reporting favorable customer retention and stable player activity in January and February.
Penn execs maintained that igaming was and remains their primary online emphasis, since it’s two to three times more remunerative than OSB. However, they said they were focused on getting ESPN Bet right, especially since improving its catchment area would ultimately filter up to the benefit of igaming itself.
Discussion of terrestrial casino performance was relatively cursory, with the first quarter of this year described as “challenging.” A “sluggish regional gaming environment” was compounded by bad weather in January, followed by a “relatively solid” February and a positive outlook for March.
Snowden was “bullish” about Penn’s four capex projects. These will come on line serially from late 2025 to early 2026, with Penn waiting until the late innings to deploy liquidity provided by Gaming & Leisure Properties.
Penn was said to be particularly keen on the prospects for its new casino in Joliet, Illinois. Execs “noted that the Joliet facility, while benefiting from the advantaged new location and the removal of maritime costs, will be part of a mixed-use development, planned by the same mixed-use developer who built the area around Ameristar St. Charles, which has been a strong property for some time” — albeit for Boyd Gaming, not Penn.
Snowden and his colleagues were expecting a high 15 percent return on investment for their $800 million outlay, which includes a new casino in Aurora, Illinois, a hotel tower for Hollywood Columbus in Ohio, and a second hotel tower for Las Vegas’s M Resort.
As far as Penn getting out of the riverboat business, Santarelli observed that “moving away from maritime regulations has historically been a driver of margin enhancement.”
