Why This Casino Analyst Says Penn Entertainment, Caesars Entertainment Are Post-Pandemic 'Over-Earners'

Zinger Key Points
  • Bank of America downgraded gaming stocks Penn Entertainment and Caesars Entertainment.
  • BofA says Caesars and Penn are among the higher-risk gaming stocks heading into 2023.
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Gambling stocks PENN Entertainment Inc PENN and Caesars Entertainment Inc CZR each traded lower Wednesday after one Wall Street casino stock analyst downgraded both stocks.

The Casino Analyst: Bank of America analyst Shaun Kelley downgraded Penn from Buy to Neutral and cut the price target from $45 to $40. Kelley also downgraded Caesars and cut the price target from $60 to $55.

Related Link: Macau Casino Stocks Rally Following License Renewal Set To Begin On Jan. 1, 2023

The Casino Takeaways: In the downgrade note, Kelley listed six reasons he is no longer bullish on Caesars and Penn:

  • Bank of America credit card data suggests slowing consumer spending trends.
  • Overall gaming spend has flattened, and casino visitation is declining.
  • Gaming stocks face risks associated with "over-earning" and deleveraging.
  • Caesars has high financial leverage and Penn has high operating leverage relative to powers.
  • Both companies have stable but lackluster iGaming market share.
  • Both stocks have limited valuation upside at current prices.

Kelley said Caesars and Penn are among the higher-risk gaming stocks he covers, and the market is not rewarding risk at the moment.

"Gaming, and esp. regionals, are the largest 'over-earners' vs. preCOVID in our coverage, but unlike other areas in consumer discretionary, estimates have not yet come down, leaving potential risk should the consumer soften," he said.

Related Link: If You Invested $1,000 In PENN Entertainment At Its Covid-19 Pandemic Low, You'd Have This Much Now

Regional casino gross gaming revenue growth has been impressive since the pandemic ended, but Kelley said recent trends suggest there is risk GGR growth could mean-revert to its pre-pandemic trendline of just 0.5% average annual gains from 2010 to 2019.

Benzinga's Take: Caesars was aggressive during the pandemic, taking on a large amount of debt in acquiring Eldorado and William Hill. Penn also made a bold move in acquiring Barstool Sports, but Penn still holds just roughly 3% online gaming market share, according to Bank of America.

Photo via Shutterstock. 

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