On Monday, BofA Securities adjusted its stance on Penn National Gaming (NASDAQ:PENN) stock, moving its rating from Buy to Neutral and reducing the price target to $17.50 from the previous $28.00. The downgrade follows Penn National's first-quarter results released on May 2, which did not meet expectations.
The firm highlighted several concerns, including the market share of ESPN Bet falling short of projections and the company's high fixed costs, which contribute to an increased earnings risk for the fourth quarter and beyond into 2025.
Penn National Gaming's core business trends have been described as lackluster, and the analyst noted that the rising leverage on the company's balance sheet could heighten execution risk and market volatility.
According to the analyst, the high cost structure of ESPN Bet is likely to extend the time required to scale the operation and increase the risk associated with its execution.
The firm's revised perspective suggests that Penn National Gaming is now seen more as a potential deep value turnaround rather than a growth opportunity, which was the initial thesis.
The sentiment towards the stock is currently low, and concerns are that the balance sheet's deterioration could take years to rectify, thereby limiting the company's strategic flexibility.
The price objective was cut based on lowered estimates, a reduced valuation for ESPN Bet, and a slightly lower core EBITDAR multiple, now at 0.5x. This reassessment by BofA Securities reflects the challenges Penn National Gaming faces in the near term as it works to stabilize its financial position and regain market confidence.
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