Amid lethargy in its interactive division and solid though not spectacular results by its land-based casinos, Penn Entertainment corporate debt may not offer much in the way of near-term upside. The take from GimmeCredit analyst Kim Noland highlights this outlook. In a new report, Noland points out that Penn is likely to generate lower free cash flow this year than it did in 2023 due to planned expenditures to enhance some of its regional casinos. She adds that losses in the operator’s digital unit, which includes ESPN Bet and the Hollywood Casino iGaming outfit, will also pinch 2024 free cash flow.
Penn has considered competitive openings in constructing guidance for regional casinos at $1.88-$2 billion of earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR). Noland writes, “Our own 2024 projections continue to reflect this guidance and the expected loss from the interactive segment. We now forecast negative free cash flow (EBITDAR less cash rent expense less capex and interest) of over $450 million.”
At the end of the second quarter, the gaming company had what it termed “traditional debt” of $1.7 billion and total liquidity of $1.9 billion, which includes $877.6 million in cash.
With the imminent arrival of the 2024 football season, there’s a sense among analysts and investors that this is “put up or shut up” time for Penn’s online sports betting ambitions. Critics argue that whether it’s ESPN Bet or its predecessor Barstool Sportsbook, Penn has spent too much capital for negligible sports betting results, thereby distracting investors from what have been mostly decent results in its core regional casino business. Management is looking to allay those concerns, but it’s accurate that the operator’s sports betting efforts are expensive.
Noland notes, “The numbers game for Interactive could improve as management steps up digital integration of ESPN Bet and the legacy ESPN product. There is a big annual cash outlay ($150 million) required under the ESPN contract — that outlay combined with the cost of the concomitant marketing effort might pay off with longer term increases in adjusted EBITDA. Penn’s strategic view of the interactive segment continues to rely on cross selling to retail casino customers and mass market sports fans.”
While ESPN Bet’s current financial results are “lackluster,” Penn management expects the business to become profitable in 2026, even if its market share doesn’t expand beyond the current level of 7%.
The bulk of corporate bonds issued by gaming companies currently carry junk ratings and that’s true of Penn debt. In her report, Noland highlights the casino operator’s bonds maturing in 2027, rating that issue as “underperform,” while adding there’s limited downside.
Following this year’s capital expenditure cycle, Penn corporate debt could be more appealing as free cash flow ramps up, but Noland cautions investors about expecting ESPN Bet to become a credible threat to entrenched incumbents.
She concludes, “The two main players in the market are unlikely to be unseated by Penn’s ESPN Bet. So we think earlier projections that ESPN Bet could achieve a big uptick in market share won’t be realized near term.”
