Amid sluggish performance in its interactive division and solid but unspectacular results from its land-based casinos, Penn Entertainment’s (NASDAQ: PENN) corporate debt may not offer significant near-term gains.
That’s the view of GimmeCredit analyst Kim Noland, who in a recent report highlighted that Penn is expected to generate lower free cash flow this year compared to 2023 due to planned investments in some of its regional casinos. Noland also pointed out that losses in the operator’s digital division, which includes ESPN Bet and the Hollywood Casino iGaming platform, will further impact free cash flow in 2024.
At the end of the second quarter, Penn reported “traditional debt” of $1.7 billion and total liquidity of $1.9 billion, which includes $877.6 million in cash.
ESPN Bet’s Performance Crucial in the Near Term
Critics argue that Penn’s investments in ESPN Bet, as well as its predecessor Barstool Sportsbook, have been excessive, delivering minimal sports betting returns and diverting attention from the company’s generally strong regional casino business.
“The numbers in the interactive division could improve as management enhances digital integration of ESPN Bet and the legacy ESPN product,” noted Noland. “There is a significant annual cash commitment ($150 million) under the ESPN contract, and that expense, combined with marketing efforts, might eventually boost adjusted EBITDA. Penn’s strategic approach in the interactive segment remains focused on cross-selling to retail casino customers and mass-market sports fans.”
Noland added that while ESPN Bet’s current financial performance is “lackluster,” Penn management anticipates the business could become profitable by 2026, even if its market share remains at its current 7%.
Penn Bonds Offer Limited Appeal
Many corporate bonds issued by gaming companies currently hold junk ratings, including Penn’s. In her report, Noland rated Penn’s bonds maturing in 2027 as “underperform” while noting that the downside risk is limited.
While Penn’s corporate debt might become more attractive after this year’s capital expenditure cycle as free cash flow increases, Noland cautioned investors against expecting ESPN Bet to pose a significant challenge to established market leaders.
“The two dominant players in the market are unlikely to be displaced by Penn’s ESPN Bet. Therefore, we believe that earlier projections of a significant market share increase for ESPN Bet are unlikely to materialize in the near term,” the analyst concluded.
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