ESPN Bet an Albatross on Penn Entertainment Stock, Says Analyst

Posted on: April 16, 2024, 08:09h. 

Last updated on: April 17, 2024, 10:05h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The ESPN Bet mobile sports wagering application, which went live last November, is likely to post a larger-than-expected first-quarter loss, thus acting as an overhang on shares of parent Penn Entertainment (NASDAQ: PENN).

Hollywood Casino ESPNN Bet Penn Entertainment
The exterior of Hollywood Casino Columbus in Ohio. An analyst says ESPN Bet is weighing on Penn Entertainment stock. (Image: USA Today)

That’s the take of Deutsche Bank analyst Carlo Santarelli who in a Monday report to clients, trimmed his price target on the stock to $19 from $22 while maintaining a “neutral” rating. The price forecast implies upside of 14.8% from Tuesday’s close and is well below the Wall Street consensus price outlook of $26.51.

While the multi-year underperformance of the shares has us intrigued, we are (still) adopting a wait and see approach on ESPN BET, which is likely the biggest driver of the stock for the foreseeable future,” wrote the analyst.

Citing low sports wagering hold, Santarelli said Penn’s digital unit is likely to post a loss of $187 million, wider than his original forecast of $167 million. The Pennsylvania-based regional casino operator is scheduled to report results for the January through March period on Thursday, May 2. Analysts expect Penn will report a quarterly loss of 58 cents a share on revenue of $1.66 billion. Over the past 90 days, nine analysts have pared earnings per share (EPS) estimates on the gaming company while none have boosted related forecasts.

Parlays Problematic for ESPN Bet

While Penn’s core competency is operating regional casinos, the hefty price the gaming company paid to Walt Disney (NYSE: DIS) for use of the ESPN brand has prompted investors to apply more scrutiny to the sports betting side of the business.

Expectations that ESPN Bet would be a money-loser for Penn for a substantial portion of this year are among the reasons the stock is down 17.8% over the past month, and more than double that just since the start of 2024.

In his report, Santarelli noted parlays have been a source of consternation for ESPN Bet in its infancy. It’s possible that over time, the operator will iron out those kinks. How much patience investors extend Penn on that front could be debatable because rivals such as DraftKings (NASDAQ: DKNG) and Flutter Entertainment’s (NYSE: FLUT) FanDuel are proving to be proficient executors in the parlay space.

Across the industry, parlays, including those of the same-game variety, are viewed as margin enhancers and profit drivers, meaning it’s pivotal operators capitalize on those opportunities.

Some Optimism for Penn’s Regional Casinos

Santarelli pointed out that as was the case with other regional casino firms, Penn was hampered by bad weather across the US in January, but revenue flattened out in February and March following a slide in the first month of the year.

Likewise, Santarelli highlighted some strength at Penn’s Midwestern venues, which provided some buffer against weakness at some of the operator’s casino hotels in the South.

Santarelli added that the M Resort in Henderson, Nev., as well as the Hollywood Columbus and two Penn casinos in Illinois, could benefit from the company’s upgrade cycle, which is expected to run through 2025.