Shares of Penn Entertainment (NASDAQ: PENN) closed higher by 3.90% today on volume that was well above the daily average after JPMorgan upgraded the gaming stock.
In a new report to clients, analyst Joseph Greff lifted his rating on the regional casino operator to “overweight” from “neutral” while boosting his price target to $27 from $19, implying upside of about 30% from current levels. He noted that while ESPN Bet looms large for the Penn stock thesis, there are pathways to upside for the shares via the company’s regional casino business.
Some degree of ESPN Bet success is the single biggest driver for the stock, (but) we see the value of the land-based casinos and market access fees equating to $26 per share, in any event,” wrote Greff.
Penn operates 43 casinos and has racetracks strewn across roughly a dozen states, making it the largest operator of regional gaming venues in the country.
Penn Spending to Enhance Regional Casinos
Since its acquisition of a stake in Barstool Sports in early 2020 followed by a $1.5 billion agreement reached last year with ESPN to use the sports network’s branding on its mobile sportsbook, much of the investment community has viewed Penn through lens of mobile sports wagering, glossing over the operator’s expansive portfolio of land-based assets.
Some analysts and investors have argued that shouldn’t be the case. Not when Penn is in the midst of a $850 million capital expenditure cycle aimed at sprucing up casinos from the Midwest to the South to Neavda. Greff said some of that spending is already paying dividends and could generate double-digit returns on investment over the long-term.
In Illinois, where it’s the dominant casino operator, Penn is spending $360 million to bring its Hollywood riverboat casino in Aurora ashore. Another $185 million is allocated to bring a riverboat gaming vessel ashore in Joliet. Those expenditures could prove crucial because casino competition is increasing in the sixth-largest state, so much so that some analysts are pondering saturation in the gaming market there.
Penn’s largest expenditures are expected to come to an end next year, meaning free cash flow could improve in 2026, allowing the gaming company to “de-lever and reduce its not so burdensome cash interest expense,” according to Greff.
Penn Transactions Possible
JPMorgan added that should Penn’s interactive business, which includes ESPN Bet, not make notable progress, it’s possible the operator could consider asset sales or mergers and acquisitions. Signs are emerging that ESPN Bet is making progress, particularly in its ability to capture female and younger bettors, but wresting market share from the likes of DraftKings and FanDuel is a long-term endeavor.
Earlier this year, a Penn shareholder said the company should abandon sports betting and consider a sale of itself outright, sparking rumors of a potential takeover by rival Boyd Gaming (NYSE: BYD), but nothing came of that speculation and Penn doesn’t appear to be a willing seller.
In terms of asset sales, Penn has levers to potentially pull, including divesting operating right to select casinos or a sale of its interactive business.
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