Roth MKM upgrades Penn Entertainment ahead of a 'potential 1Q beat/raise' By Investing.com

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Roth MKM upgrades Penn Entertainment ahead of a 'potential 1Q beat/raise'

Published May 02, 2023 10:14

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Roth MKM analysts upgraded shares of Penn Entertainment (NASDAQ:PENN) to Buy with a $40 per share price target in a note to clients Tuesday, "ahead of a potential 1Q beat/raise." Penn is set to report earnings for its latest quarter on Thursday, May 4.

The upgrade boosted Penn shares on Tuesday, which are currently trading 1.5% above the previous session's close.

Looking ahead to Penn's earnings, analysts said: "After bad weather caused 4Q22 margins to disappoint, we believe both buy/sell-side overreacted while reducing 2023 forecasts. With 1Q23 GGR improving alongside good weather and stronger demand, better 1Q margins can cause investors to reevaluate 2023. We also see an opportunity for PENN to lift 2023 EBITDA/margin guidance alongside resilient YTD gaming trends and moderating cost inflation."

Meanwhile, they stated they also see "a case for strategic alternatives" concerning Penn's digital segments and "see this narrative building in 2023."

"With PENN trading near 3yr lows and below levels from the Jan 2020 Barstool acquisition announcement, we believe very little value is priced in for Barstool/Score's media and iGaming assets," said analysts.

As a result, Roth MKM believes Penn management will take more aggressive action toward unlocking value "where proceeds could support deleveraging, particularly in a recession."

"While OSB/iGaming share gains in 2H23 can be a catalyst for PENN, we believe mgmt can unlock value even if Barstool's market share underwhelms," explained analysts. "PENN's ~9% 2023E FCF yield is comparable to regional gaming peers and implies minimal value for digital segments. Rather than sit on high-value Barstool/Score assets, we believe mgmt will eventually resort to strategic alternatives. We estimate a transaction could value digital segments at $3.3bn (3.0x 2024E sales, 35x EBITDA), where any proceeds could be used for deleveraging Penn's 4.4x net debt to EBITDAR."

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