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.
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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.
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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.
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