Shares of Caesars Entertainment (NASDAQ:CZR) and Penn Entertainment (NASDAQ:PENN) slipped Wednesday. That’s after Bank of America analyst Shaun Kelley downgraded both gaming equities.
In a note to clients today, Kelley lowered his rating on both casino operators to “neutral” from “buy,” while trimming his price target on Caesars to $55 and his forecast on Penn to $40. Year-to-date, Caesars is off almost 44%, while Penn shed nearly a third of its value.
The Bank of America analyst notes that regional casino operators could be vulnerable to declining earnings and sales estimates, which haven’t yet arrived in earnest, if consumer spending materially declines next year against the backdrop of a slowing economy.
Gaming, and especially 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,” wrote Kelley.
The commentary on regional casinos is pertinent in the cases of Penn and Caesars, because the former is the largest operator of such venues, while the latter has an extensive regional portfolio of its own.
For Penn, Barstool Enthusiasm Waning
Regarding Penn Entertainment, Kelley indicates the stock could be at risk of a momentum unwind as investor enthusiasm for the operator’s ownership of Barstool Sportsbook wanes.
“2023 is likely about refocusing & re-accelerating growth via Barstool’s media integration, the launch of its in-house technology stack, and minding a stable/cash-generative core business, albeit one with slow growth and meaningful operating leverage,” according to the analyst.
In August, Penn announced it would take full control of Barstool Sports after paying $163 million in January 2020 to acquire 36% of the sports media property. The deal was previously heralded as one of the more potent intersections of media and sports wagering. But as Kelley notes, some investors are concerned about Barstool Sportsbook’s low market share.
Last week, Penn approved a new $750 million share repurchase program, signaling that management sees value in the shares. However, some analysts and investors are fretting about the company’s spending plans, including sizable expenditures in Illinois and the doubling in size of the M Resort in Henderson, Nevada.
Caesars Consistency Could Take Awhile
Regarding Caesars, which is the second-largest operator on the Las Vegas Strip, consistent investor returns could take some time to accrue, according to Kelley.
“Rising interest rates 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,” he opined. “Given competition, it’s unlikely we see online reach its margin potential in the next 1-2 years.”
On the asset sale front, it was widely expected entering 2022 that the operator would shed one of its Strip venues in an effort to raise cash. But the plug was recently pulled on that plan.
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