PENN Disappoints With Earnings but Its Not All Doom and Gloom

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Written By Kris Enyinnaya

PENN Entertainment, Inc. (NASDAQ: PENN) recently announced its Q1 earnings, which disappointed investors and caused a significant drop in the stock price, falling more than 17% during the day and closing approximately 9% lower.

In the current stock market environment, investors tend to favor companies that generate immediate profits over those incurring high costs through investments without clear profit plans. This appears to be the case for PENN, with lower revenue and higher costs due to ESPN Bet.

Despite the disappointing first quarter earnings, PENN still has potential, given its historically low valuation in terms of Price-to-Sales multiples. The Interactive segment could potentially trigger momentum for an increase in the stock price.

First Quarter Earnings Analysis

Credits: DepositPhotos

Compared to the first quarter of 2023, PENN’s revenue for Q1 2024 decreased by 4%, and the gross margin dropped significantly from 41.8% to 29.6%. The cost of goods sold for Q1 2024 was $1,130.7 million, up from $973.8 million in Q1 2023.

According to the company’s earnings report, approximately $150 million of this increase came from gaming expenses due to ESPN Bet. This indicates that ESPN Bet continues to drive up costs for the company.

The retail business segment recorded $1.4 billion in revenue, a 3% decrease from Q1 2023. This decline was attributed to the negative impact of bad weather in January and is expected to recover gradually.

The adjusted EBITDAR margin dropped from 35.5% to 34.1% due to increased labor costs. The Interactive Segment recorded $207.7 million in revenue but incurred $196 million in EBITDAR losses. Compared to Q1 2023, revenue for this segment dropped by 11%, with substantial costs.

Revised Guidance

PENN updated its guidance for 2024, projecting revenue for the Retail segment between $5.61 billion and $5.76 billion, with EBITDAR between $1.88 billion and $2.00 billion.

This represents a slight increase in revenue but with a lower margin compared to previous guidance. For the Interactive segment, the company now expects revenue between $1.02 billion and $1.07 billion, a significant drop from the previous guidance of $1.28 billion to $1.42 billion.

The company also anticipates higher losses for this segment, ranging from $475 million to $525 million. This negative guidance may have pressured the stock price.

Qualitative Improvements

Despite the disappointing earnings report, there are some positive steps the company made during the quarter.

Firstly, Aaron LaBerge, former CTO of Disney who directed technology initiatives such as Disney Plus, was appointed as the CTO of PENN Entertainment. Improving the user experience of the ESPN Bet application is crucial for retaining sports bettors, and management is focusing on enhancing the application and increasing parlay offerings to stay competitive.

Secondly, ESPN Bet’s performance has improved in terms of hold rate, despite a decrease in market share. For example, in Maryland from January to March, the market share of ESPN Bet was 6.8%, 5.2%, and 6.1%, respectively, while the hold rates were 4.4%, 7.9%, and 1.5%.

Similar trends were observed in Iowa and Massachusetts. The overall hold rate improved from 4.4% in Q1 to 8.5% in April, indicating progress.


Credits: DepositPhotos

Despite the first quarter earnings report, PENN’s valuation remains near its historical bottom in terms of P/S multiple, which is around 0.3. The stock price dropped sharply but rebounded after reaching $13.5.

With the revised revenue guidance, the P/S multiple at $13.5 is approximately 0.306, suggesting a short-term bottom. At the current market cap of $2.4 billion, the P/S multiple is around 0.36. The current market valuation is not expensive, considering the potential for future improvements.

Risks and Conclusion

  1. Disappointing Earnings: The revised guidance for ESPN Bet is based on April hold rates and current market share trends, which may not be sustainable.
  2. Decreasing Discretionary Spending: High interest rates and inflation could reduce disposable income, affecting spending on casinos.
  3. Focus on Growth Stocks: If investors favor growth stocks such as AI-related companies, PENN may not attract as much interest, requiring patience from investors.

Despite the first quarter earnings falling short of expectations, ESPN Bet is showing signs of improvement, and PENN’s current valuation is near its historical bottom.


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