Shares of Penn Entertainment (NASDAQ: PENN) traded lower today after Bank of America pared its rating on shares of the regional casino operator.
In a new report to clients, analyst Shaun Kelley downgraded Penn to “neutral” with a price target of $22. That implies limited upside from the $21 area at which the stock resides at this writing. The analyst said Penn margins could be crimped in the coming quarters due to increased competition in some Midwest markets and Louisiana.
In regionals, we expect revenue and margin pressure from new supply to continue in 4Q and 2025 with acute impacts in Iowa/Council Bluffs, Illinois/Indiana (Joliet/East Chicago) and Louisiana (Bossier City) from casino openings, before getting a boost from $850M of capex opening in late ‘25 and ’26,” observed Kelley.
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.
Downgrade Comes as Penn Is on Torrid Pace
Bank of America’s downgrade of Penn arrived as the gaming stock is on a torrid run. The shares are up 9.70% in the week since Election Day and nearly 14% over the past month — gains that have trimmed the stock’s year-to-date loss to less than 19%.
However, big gains in short timeframes could be among the reasons why the research firm views Penn’s risk-reward profile as “balanced” for the time being. Kelley mentioned earnings risk at regional casinos, elevated fixed costs, and market share woes as among the issues that could weigh on the Penn bull thesis over the near-term.
Additionally, the operator’s already sizable debt burden is increasing due to the aforementioned spending on enhancements at regional casinos. Kelley estimates Penn’s leverage will climb to 6.3x next year, marking a roughly 50% jump from the levels seen in 2021.
On the other hand, the BofA analyst noted Penn is moving past peak leverage and losses, indicating it’s possible its balance sheet firms over the course of next year and into 2026.
ESPN Bet Issues Linger
Penn’s ESPN Bet unit has long been a source of concern and criticism among analysts and investors and while there was recently talk the online sports betting business was making progress, Kelley contests that assertion, noting ESPN Bet’s market share remains tepid.
The analyst estimates ESPN Bet has just 3% market share in sports wagering and 2% in iGaming — figures that are half what Penn projected at the start of 2024.
On the bright side, Kelley pointed that ESPN Bet has made some important technological strides in recent month, which could pay dividends in terms of customer acquisition and adding market share.
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