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Wednesday, December 14, 2022 1:31:52 PM
By: Morningstar | December 14, 2022
For Penn, 'Barstool's momentum has returned to earth,' BofA analysts say
Consumer spending at casinos is slowing and visits are declining -- and Wall Street's forecasts for the industry haven't always been in line with those trends, BofA analysts said in a note on Wednesday.
As those trends settle in, analysts at the firm downgraded both Penn Entertainment Inc. and Caesars Entertainment Inc. to neutral from buy. They also lowered their price target on Caesars to $55 from $60, and reduced their price target on Penn to $40 from $45.
Both companies were also shouldering more financial burden than their rivals, and had "lackluster" presence in the digital gaming market, the BofA analysts said. Penn's momentum from Barstool Sports -- the sports, online-betting and pop-culture media company it plans to take over -- has "returned to earth," they said.
"We think growth momentum is leveling out, with more balanced risks heading into 1H23," the BofA analysts said. "Gaming, and esp. regionals, are the largest 'over-earners' vs. pre-COVID in our coverage, but unlike other areas in consumer discretionary, estimates have not yet come down, leaving potential risk should the consumer soften."
"CZR and PENN both skew to the higher risk side of our coverage, and we are taking a more defensive stance until the macro-outlook or valuations become more compelling," they continued.
Shares of Caesars (CZR) were down 2.7% on Wednesday. Penn (PENN) fell 1.9%.
Bank of America's data on credit and debit-card spending showed that spending growth rates dipped into negative territory this month, when compared with last year, putting that growth at its lowest levels so far this year. While spending on gaming has held up, it faces threats from rising prices, higher unemployment in the event of a recession, and thinner savings.
For Caesars specifically, the analysts noted that it absorbed gambling company William Hill in 2021, following the merger deal in 2020 between Caesars and Eldorado Resorts. But they said Ceasars' debt to EBITDA levels were the highest in the industry, and said competition could weigh on margins for its online gaming segment.
"Rising interest and rent, and a weak asset sale market have slowed deleveraging, and we believe it could take 3+ years to reach leverage levels that make consistent shareholder returns possible," the analysts said. "Given competition, it's unlikely we see online reach its margin potential in the next 1-2 years."
Penn, the analysts said, helped reshape its investment narrative -- and its investor audience -- after investing in Barstool Sports, via a 36% stake in 2020 and then a $387 million deal to take over Barstool that was announced this year.
"However, Barstool's momentum has returned to earth, with online (market) share at just the 3% level, and PENN is still working to grow its in-house digital capabilities and (re)-establish itself in the top tier of the landscape," the analysts said.
"2023 is likely about refocusing & re-accelerating growth via Barstool's media integration, the launch of its in-house technology stack, and minding minding a stable/cash-generative core business, albeit one with slow growth and meaningful operating leverage," they said.
Barstool has exploded in popularity since its founding nearly two decades ago. In recent years, it has banked more on sports betting, including via the launch of its Barstool Sportsbook app. But the company has faced accusations of cultivating workplace misogyny. Its founder, Dave Portnoy, has been accused of sexual misconduct -- allegations he has vehemently denied.
Caesars stock has slid 45% year-to-date, and Penn is down 34% over that time. By comparison, the S&P 500 Index has fallen 15% year-to-date.
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