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Analysts upgraded sports betting and casino operator PENN Entertainment (NASDAQ:PENN) based on the valuation of sportsbook ESPN Bet.
The PENN Analyst: Truist analyst Barry Jonas upgrades Penn Entertainment from Hold to Buy and has a price target of $23.
The Analyst Takeaways: Penn Entertainment launched ESPN Bet in November 2023 through a licensing deal with ESPN owner The Walt Disney Company (NYSE:DIS).
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Jonas believes Penn stock is trading with no value assigned to ESPN Bet in a sum-of-the-parts calculation.
"We're upgrading Penn to Buy, largely on risk/reward, given we effectively see zero to negative value ascribed for ESPN Bet at current trading levels," Jonas said.
The analyst previously downgraded the stock in August 2023 with risks on the timeline of launching ESPN Bet and competition.
"At this point, we think expectations are too low, and the market is not only too bearish on ESPN Bet but also assuming no value for PENN's other profitable Interactive businesses."
The analyst said first-quarter results, set for May 2, could be better than low expectations currently.
A sum-of-the-parts implies no value for ESPN Bet or Interactive, Jonas said.
"Interactive is more than ESPN Bet. What we think the market is missing is that PENN Interactive is comprised of multiple businesses beyond just ESPN Bet. In the event ESPN Bet fails, then we think Interactive would still have value for Penn,” he wrote.
The analyst said Penn has valuable online licenses thanks to its land-based casinos. This could bring in $50 million to $70 million worth of recurring skin fees from other sportsbooks, he added.
The company's iGaming business also could be profitable at a smaller scale as it has different cost structure, the analyst said.
The analyst also sees some upside cases to ESPN Bet and the Interactive segment from where it is today.
"On a cash handle share basis, ESPN Bet has been a top-four player since launch at ~8%."
This puts ESPN Bet behind FanDuel, DraftKings and BetMGM, but ahead of other operators like Caesars Sportsbook, the analyst said.
PENN Price Action: Penn shares are up 2% to $17.26 on Tuesday. The stock has a 52-week trading range of $15.88 to $31.63. Shares of Penn are down 41.7% over the last year.
