Penn Entertainment’s spending plans are concerning, says an analyst

Posted on: Nov 8, 2022 at 4:34 am.

Last updated on: November 8, 2022 04:34.

Penn Entertainment (NYSE:PEN) stock doesn’t compare favorably to its peers, and the operator’s recently announced spending plans come with some risks.

PennEntertainment
Penn Entertainment’s M Resort in Henderson, Nevada. An analyst is concerned about the company’s spending plans. (Image: Jeff Scheid/Nevada independent)

Those are the views of Roth Capital analyst Edward Engel, who reiterated a hold rating on the regional casino giant’s shares with a $33 12-month price target in a note to clients today. That’s slightly below today’s close of $33.39. Penn is planning a series of new casino hotel investments in the Midwest and Nevada, and some analysts question the wisdom of such moves at a time when the company’s leverage is a concern in the investment community.

In Illinois, where it is the dominant casino operator, Penn is spending $360 million to land its Hollywood Riverboat Casino in Aurora. Another $185 million will be set aside to land a riverboat play ship in Joliet.

The operator also told investors it will spend $206 million to double the size of M Resort in Henderson, Nevada. With the recent sale of Tropicana on the Strip, M Penns is the Las Vegas Valley’s only notable venue. Penn is also planning about $100 million to build a 180-room hotel in Ohio’s Hollywood Columbus.

What Penn has to do

In all, Penn is spending $850 on various improvements to its regional casino portfolio. Engel says that for these expenses to pay off for investors, the operator must be able to generate $115 million in earnings before interest, taxes, depreciation, amortization and restructuring or lease expenses (EBITDAR).

The sale-leaseback financing structure would also push cash-on-cash yields into the high teens. While an incremental EBITDAR of $105 million would provide only 5% growth over Penn’s 2022E EBITDAR, the $90 million EBITDA would provide 14% growth over 2022E free cash flow,” wrote the analyst.

Engel notes that it might be worth considering Penn stock ahead of this free cash flow acceleration, but that jump might not come until the second half of 2025.

At the end of the third quarter, Penn had $1.7 billion in cash and cash equivalents and “traditional net debt” of $989.5 million, up $103.3 million sequentially, according to a company statement . Lease-adjusted net leverage increased to 4.3x from 4.1x at the end of 2021.

Baked bar stool value

To Penn’s credit, his Sportsbook division, Barstool, would likely be profitable in the current quarter were it not for an unusually large exposure to the World Series-winning Houston Astros.

That’s a positive at a time when rival online sportsbooks are nearing profitability, but Penn’s stock is expensive relative to its peers, Engel said.

“However, the stock will look more expensive in 2024 as capital expenditures for development ramp up. While some premium for Penn Interactive is warranted, we estimate that PENN shares imply ~2.5x EV/sales for Penn Interactive, which is a broad premium over DKNG’s 1.7x,” he concluded analyst.

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